PROPOSED REVISIONS TO UNIFORM COMMERCIAL CODE, …

D R A F T

FOR APPROVAL

PROPOSED REVISIONS TOUNIFORM COMMERCIAL CODE,

ARTICLE 7–DOCUMENTS OF TITLE

NATIONAL CONFERENCE OF COMMISSIONERSON UNIFORM STATE LAWS

andAMERICAN LAW INSTITUTE

MEETING IN ITS ONE-HUNDRED-AND-TWELFTH YEARWASHINGTON, D. C.AUGUST 1 - 7, 2003

PROPOSED REVISIONS TOUNIFORM COMMERCIAL CODE,

ARTICLE 7–DOCUMENTS OF TITLE

WITH PREFATORY NOTE AND PRELIMINARY COMMENTS

Copyright ©2003

By

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM ST ATE LAWS

AND

AMERICAN LAW INSTITUTE

_________________________________________________________________________________

The ideas and conclusions set forth in this draft, including the proposed statutory language and any comments or

reporter’s notes, have not been passed upon by the National Conference of Commissioners on Uniform State Laws

or the Drafting Committee. They do not necessarily reflect the views of the Conference and its Commissioners and

the Draftin g Com mittee an d its Mem bers and Reporte rs. Propo sed statuto ry langu age ma y not be u sed to asce rtain

the intent o r mean ing of an y prom ulgated final statutory propos al.

DRAFTING COMMITTEE TO REVISE UNIFORM COMMERCIAL CODE ARTICLE 7, DOCUMENTS OF TITLE

The Committee acting for the National Conference of Commissioners on Uniform State Lawsand the American Law Institute in preparing the Revised Uniform Commercial Code Article 7 isas follows:

HENRY DEEB GABRIEL, JR., Loyola University, School of Law, 526 Pine St., New Orleans,LA 70118, Chair

EDWARD V. CATTELL, JR., Suite 2000, 1628 John F. Kennedy Blvd., Philadelphia, PA19103, The American Law Institute Representative

PATRICIA BRUMFIELD FRY, University of Missouri-Columbia, School of Law, MissouriAve. & Conley Ave., Columbia, MO 65211

SANDRA S. STERN, Suite 612, 509 Madison Ave., New York, New York 10022NEAL OSSEN, 21 Oak St., Suite 201, Hartford, CT 06106, Enactment Plan CoordinatorDREW KERSHEN, University of Oklahoma, College of Law, 300 Timberdell Road, Norman,

OK 73019, Co-ReporterLINDA J. RUSCH, Hamline University, School of Law, 1536 Hewitt Ave., St. Paul, MN 55104,

The American Law Institute Representative and Co-Reporter

EX OFFICIOK. KING BURNETT, P.O. Box 910, Salisbury, MD 21803-0910, PresidentJOSEPH P. MAZUREK, Box 797, Helena, MT 59624, Division Chair

AMERICAN BAR ASSOCIATION ADVISORSWILLIAM H. TOWLE, P.O. Box 3267, Missoula, MT 59806-3267, American Bar Association

Advisor

EXECUTIVE DIRECTORWILLIAM H. HENNING, University of Missouri–Columbia, School of Law, 313 Hulston Hall,

Columbia, MO 65211, Executive DirectorFRED H. MILLER, University of Oklahoma, College of Law, 300 Timberdell Rd., Norman,

OK73019, Executive Director EmeritusWILLIAM J. PIERCE, 1505 Roxbury Road, Ann Arbor, MI 48104, Executive Director Emeritus

Copies of this Act may be obtained from:

NATIONAL CONFERENCE OF COMMISSIONERSON UNIFORM STATE LAWS

211 E. Ontario Street, Suite 1300Chicago, Illinois 60611

312/915-0195www.nccusl.org

UNIFORM COMMERCIAL CODE ARTICLE 7-DOCUMENTS OF TITLE

TABLE OF CONTENTS

PART 1

GENERAL

SECT ION 7 -101. SH ORT TITL E. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

SECTION 7-102. DEFINITIONS AND INDEX O F DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

SECT ION 7 -103. RE LATIO N OF A RTIC LE TO TRE ATY OR ST ATU TE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

SECTION 7-104. NEGOTIABLE AND NONNEGOTIABLE DOCUMENT OF TITLE. . . . . . . . . . . . . . . . . . . . . 9

SECTION 7-105. REISSUANCE IN ALTERNATIVE MEDIUM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

SECTION 7-106. CONTROL OF ELECTRONIC DOCUMENT OF TITLE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

PART 2

WAREHOUSE RECEIPTS: SPECIAL PROVISIONS

SECTION 7-201. PERSON THAT MAY ISSUE A WAREHOUSE RECEIPT; STORAGE UNDER BOND. . . 16

SECTION 7-202. FORM OF WAREHOUSE RECEIPT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

SECTION 7-203. LIABILITY FOR NONRECEIPT OR MISDESCRIPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

SECTION 7-204. DUTY OF CARE; CONTRACTUAL LIMITATION OF WAREHOUSE’S LIABILITY. . . . 20

SECT ION 7 -205. T ITLE UND ER W AREH OUS E REC EIPT DEFE ATE D IN C ERT AIN C ASES . . . . . . . . . . . 21

SECTION 7-206. TERMINATION OF STORAGE AT WAREHOUSE'S OPTION. . . . . . . . . . . . . . . . . . . . . . . 23

SECTION 7-207. GOODS MUST BE KEPT SEPARA TE; FUNGIBLE GOOD S. . . . . . . . . . . . . . . . . . . . . . . . 25

SECTION 7-208. ALTERED WARE HOUSE RECEIPTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

SECTION 7-209. LIEN OF WAREHOUSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

SECTION 7-210. ENFORCEMENT OF WAREHOUSE'S LIEN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

PART 3

BILLS OF LADING: SPECIAL PROVISIONS

SECT ION 7 -301. LIA BILIT Y FOR NON RECE IPT O R MIS DESC RIPT ION; "S AID T O CO NTA IN";

"SHIPPER'S LOAD AND COUNT"; IMPROPER HANDLING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

SECTION 7-302. THROUGH BILLS OF LADING AND SIMILAR DOCUMENTS OF TITLE. . . . . . . . . . . . . 39

SECTION 7-303. DIVERSION; RECONSIGNMEN T; CHANGE OF INSTRUC TIONS. . . . . . . . . . . . . . . . . . 42

SECTION 7-304. TANGIBLE BILLS OF LADING IN A SET. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

SECTION 7-305. DESTINATION BILLS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

SECT ION 7 -306. AL TER ED B ILLS O F LAD ING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

SECTION 7-307. LIEN OF CARRIER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

SECTION 7-308. ENFORCEMENT OF CARRIER'S LIEN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

SECTION 7-309. DUTY OF CARE; CONTRACTUAL LIMITATION OF CARRIER'S LIABILITY. . . . . . . . . 51

PART 4

WAREHOUSE RECEIPTS AND BILLS OF LADING: GENERAL OBLIGATIONS

SECTION 7-401. IRREGULARITIES IN ISSUE OF RECEIPT OR BILL OR CONDUCT OF ISSUER. . . . . . . 54

SECTION 7-402. DUPLICATE DOCUMENT OF TITLE; OVERISSUE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

SECTION 7-403. OBLIGATION OF WAREHOUSE OR CARRIER TO DELIVER; EXCUSE. . . . . . . . . . . . . 56

SECTION 7-404. NO LIABILITY FOR GOOD FAITH DELIVERY PURSUANT TO DOCUMENT OF TITLE. 59

PART 5

WAREHOU SE RECEIPTS AND BILLS OF LADING: NEGOTIATION AND TRANSFER

SECTION 7-501. FORM OF NEGOTIATION AND REQUIREMENTS OF DUE NEGOTIATION. . . . . . . . . . 61

SECTION 7-502. RIGHTS ACQUIRED BY DUE NEGOTIATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

SECTION 7-503. DOCUMENT OF TITLE TO GOO DS DEFEATED IN CER TAIN CASES. . . . . . . . . . . . . . . 66

SECT ION 7 -504. RIG HTS ACQU IRED IN AB SENC E OF D UE N EGO TIAT ION; E FFEC T OF DIVE RSION ;

STOPPAGE OF DELIVERY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

SECTION 7-505. INDORSER NOT GU ARANTOR FOR O THER PARTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

SECTION 7-506. DELIVERY WITHOUT INDORSEMENT: RIGHT TO COMPEL INDORSEMENT. . . . . . . 73

SECTION 7-507. WARRANTIES ON NEGOTIATION OR DELIVERY OF DOCUMENT OF TITLE. . . . . . . 74

SECTION 7-508. WARRANTIES OF COLLECTING BANK AS TO DOCUMENTS OF TITLE. . . . . . . . . . . . 75

SECT ION 7 -509. AD EQU ATE COM PLIAN CE W ITH C OMM ERCIA L CON TRA CT. . . . . . . . . . . . . . . . . . . 76

PART 6

WAREHOUSE RECEIPTS AND BILLS OF LADING: MISCELLANEOUS PROVISIONS

SECTION 7-601. LOST, STOLEN, OR DESTROYED DOCUMENTS OF TITLE. . . . . . . . . . . . . . . . . . . . . . . . 77

SECTION 7-602. ATTACHMENT OF GOODS COVERED BY NEGOTIABLE DOCUMENT OF TITLE. . . . 79

SECTION 7-603. CONFLICTING CLAIMS; INTERPLEADER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

PART 7

MISCELLANEOUS PROVISIONS

SECT ION 7 -701. EF FECT IVE D ATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

SECT ION 7 -702. RE PEAL S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

SECT ION 7 -703. AP PLICA BILIT Y. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

SECT ION 7 -704. SA VING S CLAU SE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

Appendix I

Amendments to Uniform Commercial Code Article 1

ALTERNATIVE A

SECTION 1-201. GENERAL DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

ALTERNATIVE B

SECTION 1-201. GENERAL DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90


ALTERNATIVE A

SECTION 2-103. DEFINITIONS AND INDEX OF D EFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

SECTION 2-104. DEFIN ITIONS: “MERCH ANT”; “BETW EEN ME RCHANT S’; “FINANCING AGENC Y”. 94

SECTION 2-308. ABSENCE OF SPECIFIED PLACE FOR DELIVERY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

SECTION 2-310. OPEN TIME FOR PAYMENT OR RUNNING OF CREDIT; AUTHORITY TO SHIP UNDER

RESERVATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

SECTION 2-320. C.I.F. AND C. & F. TERMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

SECTION 2-323. FORM OF BILL OF LADING REQ UIRED IN OVERSEAS SHIPM ENT; "OVERSEAS". . . 96

SECTIO N 2-401. PASSIN G OF TIT LE; RESERV ATION F OR SECU RITY; LIM ITED AP PLICATIO N OF TH IS

SECT ION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

SECTIONS 2-403. POW ER TO TR ANSFER; GOO D FAITH PU RCHASE OF G OODS; “ENTR USTING”. . 99

SECTION 2-503. MANNER OF SELLER’S TENDER OF DELIVERY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

SECTION 2-505. SELLER’S SHIPMENT UNDER RESERVATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

SECTION 2-506. RIGHTS OF FINANCING AGENCY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

SECTION 2-509. RISK OF LOSS IN THE ABSENCE OF BREACH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102

SECTION 2-513. BUYER’S RIGHT TO INSPECT ION OF THE GOO DS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

SECTION 2-605. WAIVER OF BUYER’S OBJECTIONS BY FAILURE TO PARTICULARIZE. . . . . . . . . . 103

SECTION 2-705. SELLER’S STOPPAGE OF DELIVERY IN TRANSIT OR OTHERWISE. . . . . . . . . . . . . . 104

ALTERNATIVE B

SECTION 2-103. DEFINITIONS AND INDEX OF D EFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

SECTION 2–1 04. DEFINITIONS: “ME RCHANT ”; “BETWEEN MERCHA NTS”; “FINANCING A GENCY”. 105

SECTION 2–310. OPEN TIME FOR PAYMENT OR RUNNING OF CREDIT AUTHORITY TO SHIP UNDER

RESERVATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

SECTIO N 2–401. PA SSING OF TITLE; RE SERVAT ION FOR SECURIT Y; LIMITE D APPLIC ATION O F THIS

SECTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

SECTION 2-503. MANNER OF SELLER’S TENDER OF DELIVERY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

SECTION 2-506. RIGHTS OF FINANCING AGENCY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

SECTION 2-509. RISK OF LOSS IN THE ABSENCE OF BREACH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

SECTION 2-605. WAIVER OF BUYER’S OBJECTIONS BY FAILURE TO PARTICULARIZE. . . . . . . . . . 109

SECTION 2-705. SELLER’S STOPPAGE OF DELIVERY IN TRANSIT OR OTHERWISE. . . . . . . . . . . . . . 109

Amendments to Uniform Commercial Code Article 2A

ALTERNATIVE A

SECTION 2A-103. DEFINITIONS AND INDEX O F DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

SECTION 2A-514. WAIVER OF LESSEE’S OBJECTION S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

SECTION 2A-526. LESSOR’S STOPPAGE OF DELIVERY IN TRANSIT OR OTHERWISE. . . . . . . . . . . . 112

ALTERNATIVE B

SECTION 2A-514. WAIVER OF LESSEE’S OBJECTION S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112

SECTION 2A–526. LESSOR’S STOPPAGE OF DELIVERY IN TRANSIT OR OTHERWISE. . . . . . . . . . . . . 112



SECTION 4-210. SECURITY INTEREST OF COLLECTING BANK IN ITEMS, ACCOMPANYING

DOCUMEN TS AND PROCEE DS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

SECTION 4-501. HANDLING OF DOCUMENTARY DRAFTS; DUTY TO SEND FOR PRESENTMENT AND

TO NOTIFY CUSTOMER OF DISHONO R. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

SECTION 4-503. RESPONSIBILITY OF PRESENTING BANK FOR DOCUMENTS AND GOODS; REPORT

OF REASONS FOR DISHONOR; REFEREE IN CASE OF NEED. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116


SECTION 5-102. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

SECTION 5-108. ISSUER’S RIGHTS AND OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

SECTION 5-113. TRANSFER BY OPERATION OF LAW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117


SECTION 8-103. RULES FOR DETERMINING WHETHER CERTAIN OBLIGATIONS AND INTERESTS

ARE SECURITIES OF FINANCIAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118



SECTION 9-203. ATTACHMEN T AND ENFORC EABILITY OF SECURITY INT EREST; PROCEEDS;

SUPPORTING O BLIGATIONS; FORMAL REQU ISITES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120

SECTION 9-207. RIGHTS AND DUTIES OF SECURED PARTY HAVING POSSESSION OR CONTROL OF

COLLATERAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122

SECTION 9-208. ADDITIONAL DUTIES OF SECU RED PARTY HA VING CONTRO L OF COLLATERAL. 122

SECTION 9-301. LAW GOVERN ING PERFECTION AND PRIORITY OF SECURITY INT ERESTS. . . . . . 125

SECTION 9-308. WHEN SECURITY INTEREST OR AGRICULTURAL LIEN IS PERFECTED; CONTINUITY

OF PERFECTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

SECTION 9-310. WHEN FILING REQUIRED TO PERFECT SECURITY INTEREST OR AGRICULTURAL

LIEN; SECURITY INTERESTS AND AGRICULTURAL LIENS TO WHICH FILING PROVISIONS DO

NOT APPLY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

SECTION 9-312. PERFECTION OF SECURITY INTERESTS IN CHATT EL PAPER, DEPOSIT ACCOU NTS,

DOCUMENTS, GOODS COVERED BY DOCUMENTS, INSTRUMENTS, INVESTMENT PROPERTY,

LETTER-OF-CREDIT RIGHTS, AND MONEY; PERFECTION BY PERMISSIVE FILING; TEMPORARY

PERFECTION WITHOUT FILING OR TRANSFER OF POSSESSION. . . . . . . . . . . . . . . . . . . . . . . . . . . 128

SECTION 9-313. WHEN POSSESSION BY OR DELIVERY TO SECURED PARTY PERFECTS SECURITY

INTEREST WITHOUT FILING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130

SECTION 9-314. PERFECTION BY CO NTROL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131

SECTION 9-317. INTERESTS THAT T AKE PRIORITY OVE R OR TAKE FREE OF SE CURITY INTEREST

OR AGRICULTURAL LIEN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

SECTION 9-322. PRIORITIES AMONG CONFLICTING SECURITY INTERESTS IN AND AGRICULTURAL

LIENS ON SAME COLLAT ERAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133

SECTION 9-323. FUTURE ADVANC ES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

SECTION 9-338. PRIORITY OF SECURITY INTEREST OR AGRICULTURAL LIEN PERFECTED BY FILED

FINANCING STATEMENT PROVIDING CERTAIN INCORRECT INFORMATION. . . . . . . . . . . . . . . 134

SECTION 9-601. RIGHTS AFTER DEFAULT; JUDICIAL ENFORCEMENT; CONSIGNOR OR BUYER OF

ACCOUNTS, CHATT EL PAPER, PAYMENT INTANGIBLES, OR PROM ISSORY NOTES. . . . . . . . . . 135

1

UNIFORM COMMERCIAL CODE ARTICLE 7-DOCUMENTS OF TITLE12

Prefatory Note34

Article 7 is the last of the articles of the Uniform Commercial Code to be revised during the5preceding decade. The genesis of this project is twofold: to provide a framework for the further6development of electronic documents of title and to update the article for modern times in light7of state, federal and international developments. Each section has been reviewed to determine its8suitability given modern practice, the need for medium and gender neutrality, and modern9statutory drafting.10

11To provide for electronic documents of title, several definitions in Article 1 were revised12

including “bearer,” “bill of lading,” “delivery,” “document of title,” “holder,” and “warehouse13receipt.” The concept of an electronic document of title allows for commercial practice to14determine what records issued by bailees are “in the regular course of business or financing” and15are “treated as adequately evidencing that the person in possession or control of the record is16entitled to receive, control, hold, and dispose of the record and the goods the record covers.” 17Rev. Section 1-201(b)(16). Such records in electronic form are electronic documents of title and18in tangible form are tangible documents of title. Conforming amendments to other Articles of19the UCC are also necessary to fully integrate electronic documents of title into the UCC. 20Conforming amendments to other Articles of the UCC are contained in Appendix I. 21

22Key to the integration of the electronic document of title scheme is the concept of “control”23

defined in Section 7-106. This definition is adapted from the Uniform Electronic Transactions24Act § 16 on Transferrable Records and from Uniform Commercial Code § 9-105 concerning25control of electronic chattel paper. Control of an electronic document of title is the conceptual26equivalent to possession and indorsement of a tangible document of title. Of equal importance is27the acknowledgment that parties may desire to substitute an electronic document of title for an28already-issued paper document and vice versa. Section 7-105 sets forth the minimum29requirements that need to be fulfilled in order to give effect to the substitute document issued in30the alternate medium. To the extent possible, the rules for electronic documents of title are the31same or as similar as possible to the rules for tangible documents of title. If a rule is meant to be32limited to one medium or the other, that is clearly stated. Rules that reference documents of33title, warehouse receipts, or bills of lading without a designation to “electronic” or “tangible”34apply to documents of title in either medium. As with tangible negotiable documents of title,35electronic negotiable documents of title may be negotiated and duly negotiated. Section 7-501.36

37Other changes that have been made are:381. New definitions of “carrier,” “good faith,” “record”, “sign” and “shipper” in Section 7-39

102.402. Deletion of references to tariffs or filed classifications given the deregulation of the41

affected industries. See e.g. section 7-103 and 7-309, 423. Clarifying the rules regarding when a document is nonnegotiable. Section 7-104.43

2

4. Making clear when rules apply just to warehouse receipts or bills of lading, thus1eliminating the need for former section 7-105.2

5. Clarifying that particular terms need not be included in order to have a valid warehouse3receipt. Section 7-202.4

6. Broadening the ability of the warehouse to make an effective limitation of liability in its5warehouse receipt or storage agreement in accord with commercial practice. Section 7-204.6

7. Allowing a warehouse to have a lien on goods covered by a storage agreement and7clarifying the priority rules regarding the claim of a warehouse lien as against other interests. 8Section 7-209.9

8. Conforming language usage to modern shipping practice. Sections 7-301 and 7-302.109. Clarifying the extent of the carrier’s lien. Section 7-307.1110. Adding references to Article 2A when appropriate. See e.g. Sections 7-503, 7-504, 7-12

509.1311. Clarifying that the warranty made by negotiation or delivery of a document of title14

should apply only in the case of a voluntary transfer of possession or control of the document. 15Section 7-507.16

12. Providing greater flexibility to a court regarding adequate protection against loss when17ordering delivery of the goods or issuance of a substitute document. Section 7-601.18

13. Providing conforming amendments to the other Articles of the Uniform Commercial19Code to accommodate electronic documents of title.20

21Legislative Note: All cross-references in this draft to Article 1 are to Revised Article 1 (2001). 22In the event a state has not enacted Revised Article 1, the cross-references should be changed to23refer to the relevant sections in former Article 1.24

3

UNIFORM COMMERCIAL CODE ARTICLE 7-DOCUMENTS OF TITLE12

PART 13

GENERAL4

5

SECTION 7-101. SHORT TITLE. This article may be cited as Uniform Commercial6

Code-Documents of Title.7

Preliminary Comments89

Prior Uniform Statutory Provision: Former Section 7-101.1011

Changes: Revised for style only.1213

This Article is a revision of the 1962 Official Text with Comments as amended since 1962. 14The 1962 Official Text was a consolidation and revision of the Uniform Warehouse Receipts Act15and the Uniform Bills of Lading Act, and embraced the provisions of the Uniform Sales Act16relating to negotiation of documents of title.17

This Article does not contain the substantive criminal provisions found in the Uniform18Warehouse Receipts and Bills of Lading Acts. These criminal provisions are inappropriate to a19Commercial Code, and for the most part duplicate portions of the ordinary criminal law relating20to frauds. This revision deletes the former Section 7-105 that provided that courts could apply a21rule from Parts 2 and 3 by analogy to a situation not explicitly covered in the provisions on22warehouse receipts or bills of lading when it was appropriate. This is, of course, an23unexceptional proposition and need not be stated explicitly in the statute. Thus former Section 7-24105 has been deleted. Whether applying a rule by analogy to a situation is appropriate depends25upon the facts of each case.26

The Article does not attempt to define the tort liability of bailees, except to hold certain27classes of bailees to a minimum standard of reasonable care. For important classes of bailees,28liabilities in case of loss, damages or destruction, as well as other legal questions associated with29particular documents of title, are governed by federal statutes, international treaties, and in some30cases regulatory state laws, which supersede the provisions of this Article in case of31inconsistency. See Section 7-103.32

3334

SECTION 7-102. DEFINITIONS AND INDEX OF DEFINITIONS.35

(a) In this article, unless the context otherwise requires:36

4

(1) "Bailee" means a person that by a warehouse receipt, bill of lading, or other1

document of title acknowledges possession of goods and contracts to deliver them.2

(2) “Carrier” means a person that issues a bill of lading.3

(3) "Consignee" means a person named in a bill of lading to which or to whose order4

the bill promises delivery.5

(4) "Consignor" means a person named in a bill of lading as the person from which6

the goods have been received for shipment.7

(5) "Delivery order" means a record that contains an order to deliver goods directed to8

a warehouse, carrier, or other person that in the ordinary course of business issues warehouse9

receipts or bills of lading.10

(6) “Good faith” means honesty in fact and the observance of reasonable commercial11

standards of fair dealing.12

(7) "Goods" means all things that are treated as movable for the purposes of a contract13

for storage or transportation.14

(8) "Issuer" means a bailee that issues a document of title or, in the case of an15

unaccepted delivery order, the person that orders the possessor of goods to deliver. The term16

includes a person for which an agent or employee purports to act in issuing a document if the17

agent or employee has real or apparent authority to issue documents, even if the issuer did not18

receive any goods, the goods were misdescribed, or in any other respect the agent or employee19

violated the issuer’s instructions.20

(9) “Person entitled under the document” means the holder, in the case of a negotiable21

document of title, or the person to which delivery of the goods is to be made by the terms of, or22

5

pursuant to instructions in a record under, a nonnegotiable document of title.1

(10) “Record” means information that is inscribed on a tangible medium or that is2

stored in an electronic or other medium and is retrievable in perceivable form.3

(11) “Sign” means, with present intent to authenticate or adopt a record:4

(A) to execute or adopt a tangible symbol; or 5

(B) to attach to or logically associate with the record an electronic sound, symbol,6

or process.7

(12) “Shipper” means a person that enters into a contract of transportation with a8

carrier.9

(13) "Warehouse" means a person engaged in the business of storing goods for hire.10

(b) Definitions in other articles applying to this article and the sections in which they11

appear are:12

(1) “Contract for sale”, Section 2-106.13

(2) “Lessee in ordinary course”, Section 2A-103.14

(3) “‘Receipt’ of goods”, Section 2-103.15

(c) In addition, Article 1 contains general definitions and principles of construction and16

interpretation applicable throughout this article.17

Legislative Note: If the state has enacted Revised Article 1, the definitions of “good faith” in18subsection (a)(6) and “record” in (a)(10) need not be enacted in this section as they are19contained in Article 1, Section 1-201. These subsections should be marked as “reserved” in20order to provide for uniform numbering of subsections.21

22Preliminary Comments23

24Prior Uniform Statutory Provision: Former Section 7-102.25

26

6

Changes: New definitions of “carrier,” “good faith,” “record,” “sign,” and “shipper.” Other1definitions revised to accommodate electronic mediums.2

3Purposes:4

51. "Bailee" is used in this Article as a blanket term to designate carriers, warehousemen and6

others who normally issue documents of title on the basis of goods which they have received. 7The definition does not, however, require actual possession of the goods. If a bailee8acknowledges possession when it does not have possession, the bailee is bound by sections of9this Article which declare the "bailee's" obligations. (See definition of "Issuer" in this section10and Sections 7-203 and 7-301 on liability in case of non-receipt.) A “carrier” is one type of11bailee and is defined as a person that issues a bill of lading. A “shipper” is a person who enters12into the contract of transportation with the carrier. The definitions of “bailee,” “consignee,” 13“consignor,” “goods”, and “issuer”, are unchanged in substance from prior law. “Document of14title” is defined in Article 1.15

2. The definition of warehouse receipt contained in the general definitions section of this Act16(Section 1-201) does not require that the issuing warehouse be "lawfully engaged" in business or17for profit. The warehouse's compliance with applicable state regulations such as the filing of a18bond has no bearing on the substantive issues dealt with in this Article. Certainly the issuer's19violations of law should not diminish its responsibility on documents the issuer has put in20commercial circulation. But it is still essential that the business be storing goods "for hire"21(Section 1-201 and this section). A person does not become a warehouse by storing its own22goods.23

3. When a delivery order has been accepted by the bailee it is for practical purposes24indistinguishable from a warehouse receipt. Prior to such acceptance there is no basis for25imposing obligations on the bailee other than the ordinary obligation of contract which the bailee26may have assumed to the depositor of the goods. Delivery orders may be either electronic or27tangible documents of title. See definition of “document of title” in Section 1-201.28

4. The obligation of good faith imposed by this Article and by Article 1, Section1-30429includes the observance of reasonable commercial standards of fair dealing. 30

5. The definitions of “record” and “sign” are included to facilitate electronic mediums. See31comment 9 to Section 9-102 discussing “record” and comment ___ to amended Section 2-10332discussing “sign.” 33

6. “Person entitled under the document” is moved from former Section 7-403.347. These definitions apply in this Article unless the context otherwise requires. The35

“context” is intended to refer to the context in which the defined term is used in the Uniform36Commercial Code. The definition applies whenever the defined term is used unless the context37in which the defined term is used in the statute indicates that the term was not used in its defined38sense. See comment to Section 1-201.39

40Cross References:41Point 1: Sections 7-203 and 7-301.42Point 2: Sections 1-201 and 7-203.43

7

Point 3: Section 1-201.1Point 4: Section 1-304.2Point 5: Section 9-102 and 2-103.3See general comment to document of title in Section 1-201.4

5Definitional Cross References:6"Bill of lading". Section 1-201.7"Contract". Section 1-201.8"Contract for sale". Section 2-106.9"Delivery". Section 1-201.10"Document of title". Section 1-201.11"Person". Section 1-201.12"Purchase". Section 1-201.13"Receipt of goods". Section 2-103.14"Right". Section 1-201.15"Warehouse receipt". Section 1-201.16

171819

SECTION 7-103. RELATION OF ARTICLE TO TREATY OR STATUTE. 20

(a) This article is subject to any treaty or statute of the United States or a regulatory21

statute of this State to the extent the treaty, statute, or regulatory statute is applicable.22

(b) This article does not repeal or modify any law prescribing the form or contents of a23

document of title or the services or facilities to be afforded by a bailee, or otherwise regulating a24

bailee’s businesses in respects not specifically treated in this article. However, violation of these25

laws does not affect the status of a document of title that otherwise complies with the definition26

of a document of title. 27

(c) This [Act] modifies, limits, and supersedes the federal Electronic Signatures in28

Global and National Commerce Act (15 U.S.C. Section 7001, et. seq.) but does not modify, limit,29

or supersede Section 101(c) of that act (15 U.S.C. Section 7001(c)) or authorize electronic30

delivery of any of the notices described in Section 103(b) of that act (15 U.S.C. Section 7003(b)).31

8

(d) To the extent there is a conflict between the Uniform Electronic Transactions Act1

and this article, this article governs.2


Prior Uniform Statutory Provision: Former Sections 7-103 and 10-104.56

Changes: Deletion of references to tariffs and classifications; incorporation of former Section710-104 into subsection (b).8

9Purposes:10

1. To make clear what would of course be true without the Section, that applicable Federal11law is paramount.12

2. To make clear also that regulatory state statutes (such as those fixing or authorizing a13commission to fix rates and prescribe services, authorizing different charges for goods of14different values, and limiting liability for loss to the declared value on which the charge was15based) are not affected by the Article and are controlling on the matters which they cover unless16preempted by federal law. The reference in former Section 7-103 to tariffs, classifications, and17regulations filed or issued pursuant to regulatory state statutes has been deleted as inappropriate18in the modern era of diminished regulation of carriers and warehouses. If a regulatory scheme19requires a carrier or warehouse to issue a tariff or classification, that tariff or classification would20be given effect via the state regulatory scheme that this Article recognizes as controlling. 21Permissive tariffs or classifications would not displace the provisions of this act, pursuant to this22section, but may be given effect through the ability of parties to incorporate those terms by23reference into their agreement.24

3. The document of title provisions of this act supplement the federal law and regulatory25state law governing bailees. This Article focuses on the commercial importance and usage of26documents of title. State ex. rel Public Service Commission v. Gunkelman & Sons, Inc., 21927N.W.2d 853 (N.D. 1974).28

4. Subsection (c) is included to make clear the interrelationship between the federal29Electronic Signatures in Global and National Commerce Act and this article. Section 102 of the30federal act allows a State statute to modify, limit, or supersede the provisions of Section 101 of31the federal act. See the comments to Revised Article 1, Section 1-108.32

5. Subsection (d) makes clear that once this article is in effect, its provisions regarding33electronic commerce and regarding electronic documents of title control in the event there is a34conflict with the provisions of the Uniform Electronic Transactions Act.35

36Cross References:37Sections 1-108, 7-201, 7-202, 7-204, 7-206, 7-309, 7-401, 7-403.38

39Definitional Cross Reference:40"Bill of lading". Section 1-201.41

9

1SECTION 7-104. NEGOTIABLE AND NONNEGOTIABLE DOCUMENT OF TITLE.2

(a) A document of title is negotiable if by its terms the goods are to be delivered to bearer3

or to the order of a named person.4

(b) A document of title other than one described in subsection (a) is nonnegotiable. A bill5

of lading that states that the goods are consigned to a named person is not made negotiable by a6

provision that the goods are to be delivered only against an order in a record signed by the same7

or another named person.8

(c) A document of title is nonnegotiable if, at the time it is issued, the document has a9

conspicuous legend, however expressed, that it is nonnegotiable.10

11Proposed Comment12

13Prior Uniform Statutory Provision: Former Section 7-104.14

15Changes: Subsection (a) is revised to reflect modern style and trade practice. Subsection (b) is16revised for style and medium neutrality. Subsection (c) is new.17

18Purposes:19

1. This Article deals with a class of commercial paper representing commodities in storage or20transportation. This "commodity paper" is to be distinguished from what might be called "money21paper" dealt with in the Article of this Act on Commercial Paper (Article 3) and "investment22paper" dealt with in the Article of this Act on Investment Securities (Article 8). The class of23"commodity paper" is designated "document of title" following the terminology of the Uniform24Sales Act Section 76. Section 1-201. The distinctions between negotiable and nonnegotiable25documents in this section makes the most important subclassification employed in the Article, in26that the holder of negotiable documents may acquire more rights than its transferor had (See27Section 7-502). The former Section 7-104, which provided that a document of title was28negotiable if it runs to a named person or assigns if such designation was recognized in overseas29trade, has been deleted as not necessary in light of current commercial practice. 30

A document of title is negotiable only if it satisfies this section. "Deliverable on proper31indorsement and surrender of this receipt" will not render a document negotiable. Bailees often32include such provisions as a means of insuring return of nonnegotiable receipts for record33purposes. Such language may be regarded as insistence by the bailee upon a particular kind of34

10

receipt in connection with delivery of the goods. Subsection (a) makes it clear that a document is1not negotiable which provides for delivery to order or bearer only if written instructions to that2effect are given by a named person. Either tangible or electronic documents of title may be3negotiable if the document meets the requirement of this section.4

2. Prior to issuance, an issuer may stamp or otherwise provide by a notation on the document5of title that it is nonnegotiable even if the document would otherwise comply with the6requirement of subsection (a). Subsection (c). Subsection (c) is derived from Section 3-104(d). 7Once issued as a negotiable document of title, the document cannot be changed from a negotiable8document to a nonnegotiable document. However, one can fail to negotiate a negotiable9document of title by due negotiation. See Section 7-501(5). A document of title that is10nonnegotiable cannot be made negotiable by stamping or providing a notation that the document11is negotiable. The only way to make a document of title negotiable is to comply with subsection12(a).13

14Cross Reference: Sections 7-501 and 7-502.15

16Definitional Cross References:17"Bearer". Section 1-201.18"Bill of lading". Section 1-201.19"Delivery". Section 1-201.20"Document of title". Section 1-201.21"Person". Section 1-201.22“Sign”. Section 7-10223"Warehouse receipt". Section 1-201.24

252627

SECTION 7-105. REISSUANCE IN ALTERNATIVE MEDIUM.28

(a) Upon request of a person entitled under an electronic document of title, the issuer of29

the electronic document may issue a tangible document of title as a substitute for the electronic30

document if:31

(1) the person entitled under the electronic document surrenders control of the32

document to the issuer; and33

(2) the tangible document when issued contains a statement that it is issued in34

substitution for the electronic document.35

11

(b) Upon issuance of a tangible document of title in substitution for an electronic1

document of title in accordance with subsection (a):2

(1) the electronic document ceases to have any effect or validity; and3

(2) the person that procured issuance of the tangible document warrants to all4

subsequent persons entitled under the tangible document that the warrantor was a person entitled5

under the electronic document when the warrantor surrendered control of the electronic6

document to the issuer.7

(c) Upon request of a person entitled under a tangible document of title, the issuer of the8

tangible document may issue an electronic document of title as a substitute for the tangible9

document if:10

(1) the person entitled under the tangible document surrenders possession of the11

document to the issuer; and12

(2) the electronic document when issued contains a statement that it is issued in13

substitution for the tangible document.14

(d) Upon issuance of the electronic document of title in substitution for a tangible15

document of title in accordance with subsection (c):16

(1) the tangible document ceases to have any effect or validity; and17

(2) the person that procured issuance of the electronic document warrants to all18

subsequent persons entitled under the electronic document that the warrantor was a person19

entitled under the tangible document when the warrantor surrendered possession of the tangible20

document to the issuer.21

12


Prior Uniform Statutory Provisions: None.23

Other relevant law: UNCITRAL Draft Instrument on Transport Law.45

Purpose:67

1. This section allows for documents of title issued in one medium to be reissued in another8medium. This section applies to both negotiable and nonnegotiable documents. This section sets9forth minimum requirements for giving the reissued document effect and validity. The issuer is10not required to issue a document in an alternative medium and if the issuer chooses to do so, it11may impose additional requirements. Because a document of title imposes obligations on the12issuer of the document, it is imperative for the issuer to be the one who issues the substitute13document in order for the substitute document to be effective and valid.14

2. The request must be made to the issuer by the person entitled to enforce the document of15title (Section 7-102(a)(9)) and that person must surrender possession or control of the original16document to the issuer. The reissued document must have a notation that it has been issued as a17substitute for the original document. These minimum requirements must be met in order to give18the substitute document effect and validity. If these minimum requirements are not met for19issuance of a substitute document of title, the original document of title continues to be effective20and valid. However, if the minimum requirements imposed by this section are met, in addition to21any other requirements that the issuer may impose, the substitute document will be the document22that is effective and valid.23

3. To protect parties who subsequently take the substitute document of title, the person who24procured issuance of the substitute document warrants that it was a person entitled under the25original document at the time it surrendered possession or control of the original document to the26issuer. This warranty is modeled after the warranty found in Section 4-209.27

28Cross Reference: Sections 7-106 and 7-601.29Definitional Cross Reference: “Person entitled to enforce,” Section 7-102.30

3132

SECTION 7-106. CONTROL OF ELECTRONIC DOCUMENT OF TITLE.33

(a) A person has control of an electronic document of title if a system employed for34

evidencing the transfer of interests in the electronic document reliably establishes that person as35

the person to which the electronic document was issued or transferred.36

(b) A system satisfies subsection (a), and a person is deemed to have control of an37

13

electronic document of title, if the document is created, stored, and assigned in such a manner1

that:2

(1) a single authoritative copy of the document exists which is unique, identifiable,3

and, except as otherwise provided in paragraphs (4), (5), and (6), unalterable;4

(2) the authoritative copy identifies the person asserting control as:5

(A) the person to which the document was issued; or6

(B) if the authoritative copy indicates that the document has been transferred, the7

person to which the document was most recently transferred;8

(3) the authoritative copy is communicated to and maintained by the person asserting9

control or its designated custodian;10

(4) copies or amendments that add or change an identified assignee of the11

authoritative copy can be made only with the consent of the person asserting control; 12

(5) each copy of the authoritative copy and any copy of a copy is readily identifiable13

as a copy that is not the authoritative copy; and14

(6) any amendment of the authoritative copy is readily identifiable as authorized or15

unauthorized.16


Prior Uniform Statutory Provision: Uniform Electronic Transactions Act Section 16.1920

Purpose:2122

1. The section defines “control” for electronic documents of title and derives its rules from23the Uniform Electronic Transactions Act § 16 on transferrable records. Unlike UETA § 16,24however, a document of title may be reissued in an alternative medium pursuant to Section 7-25105. At any point in time in which a document of title is in electronic form, the control concept26of this section is relevant. As under UETA § 16, the control concept embodied in this section27

14

provides the legal framework for developing systems for electronic documents of title.12. Control of an electronic document of title substitutes for the concept of indorsement and2

possession in the tangible document of title context. See Section 7-501. A person with a tangible3document of title delivers the document by voluntarily transferring possession and a person with4an electronic document of title delivers the document by voluntarily transferring control. 5(Delivery is defined in Section 1-201). 6

3. Subsection (a) sets forth the general rule that the “system employed for evidencing the7transfer of interests in the electronic document reliably establishes that person as the person to8which the electronic document was issued or transferred.” The key to having a system that9satisfies this test is that identity of the person to which the document was issued or transferred10must be reliably established. Of great importance to the functioning of the control concept is to11be able to demonstrate, at any point in time, the one person entitled under the electronic12document. For example, a carrier may issue an electronic bill of lading by having the required13information in a database that is encrypted and accessible by virtue of a password. If the14computer system in which the required information is maintained identifies the person as the15person to which the electronic bill of lading was issued or transferred, that person has control of16the electronic document of title. That identification may be by virtue of passwords or other17encryption methods. Registry systems may satisfy this test. This Article leaves to the market18place the development of sufficient technologies and business practices that will meet the test. 19

An electronic document of title is evidenced by a record consisting of information stored in20an electronic medium. Section 1-201. For example, a record in a computer database could be an21electronic document of title assuming that it otherwise meets the definition of document of title. 22To the extent that third parties wish to deal in paper mediums, Section 7-105 provides a23mechanism for exiting the electronic environment by having the issuer reissue the document of24title in a tangible medium. Thus if a person entitled to enforce an electronic document of title25causes the information in the record to be printed onto paper without the issuer’s involvement in26issuing the document of title pursuant to Section 7-105, that paper is not a document of title.27

4. Subsection (a) sets forth the general test for control. Subsection (b) sets forth a safe28harbor test that if satisfied, results in control under the general test in subsection (a). The test in29subsection (b) is also used in Section 9-105 although Section 9-105 does not include the general30test of subsection (a). Under subsection (b), at any point in time, a party should be able to31identify the single authoritative copy which is unique and identifiable as the authoritative copy. 32This does not mean that once created that the authoritative copy need be static and never moved33or copied from its original location. To the extent that backup systems exist which result in34multiple copies, the key to this idea is that at any point in time, the one authoritative copy needs35to be unique and identifiable.36

Parties may not by contract provide that control exists. The test for control is a factual test37that depends upon whether the general test in subsection (a) or the safe harbor in subsection (b) is38satisfied.39

5. Article 7 has historically provided for rights under documents of title and rights of40transferees of documents of title as those rights relate to the goods covered by the document. 41Third parties may possess or have control of documents of title. While misfeasance or42negligence in failure to transfer or misdelivery of the document by those third parties may create43

15

serious issues, this Article has never dealt with those issues as it relates to tangible documents of1title, preferring to leave those issues to the law of contracts, agency and tort law. In the2electronic document of title regime, third party registry systems are just beginning to develop. It3is very difficult to write rules regulating those third parties without some definitive sense of how4the third party registry systems will be structured. Systems that are evolving to date tend to be5“closed” systems in which all participants must sign on to the master agreement which provides6for rights as against the registry system as well as rights among the members. In those closed7systems, the document of title never leaves the system so the parties rely upon the master8agreement as to rights against the registry in its failures in dealing with the document. This9article contemplates that those “closed” systems will continue to evolve and that the control10mechanism in this statute provides a method for the participants in the closed system to achieve11the benefits of obtaining control allowed by this article. 12

This article also contemplates that parties will evolve open systems where parties need not be13subject to a master agreement. In an open system a party that is expecting to obtain rights14through an electronic document may not be a party to the master agreement. To the extent that15open systems evolve by use of the control concept contained in this section, the law of contracts,16agency, and torts as it applies to the registry’s misfeasance or negligence concerning the transfer17of control of the electronic document will allocate the risks and liabilities of the parties as that18other law now does so for third parties who hold tangible documents and fail to deliver the19documents.20

21Cross Reference: Section 7-105.22

23

16

PART 21

WAREHOUSE RECEIPTS: SPECIAL PROVISIONS2

3

SECTION 7-201. PERSON THAT MAY ISSUE A WAREHOUSE RECEIPT; 4

STORAGE UNDER BOND.5

(a) A warehouse receipt may be issued by any warehouse.6

(b) If goods, including distilled spirits and agricultural commodities, are stored under a7

statute requiring a bond against withdrawal or a license for the issuance of receipts in the nature8

of warehouse receipts, a receipt issued for the goods is deemed to be a warehouse receipt even if 9

issued by a person that is the owner of the goods and is not a warehouse.10



Changes: Update for style only. 1516

Purposes:17It is not intended by re-enactment of subsection (a) to repeal any provisions of special18

licensing or other statutes regulating who may become a warehouse. Limitations on the transfer19of the receipts and criminal sanctions for violation of such limitations are not impaired. Section207-103. Compare Section 7-401(4) on the liability of the issuer in such cases. Subsection (b)21covers receipts issued by the owner for whiskey or other goods stored in bonded warehouses22under such statutes as 26 U.S.C. Chapter 51.23

24Cross References: Sections 7-103, 7-401.25

26Definitional Cross References:27"Warehouse receipt". Section 1-201.28"Warehouse". Section 7-102.29

303132

17

SECTION 7-202. FORM OF WAREHOUSE RECEIPT.1

(a) A warehouse receipt need not be in any particular form.2

(b) Unless a warehouse receipt provides for each of the following, the warehouse is liable3

for damages caused to a person injured by its omission:4

(1) the location of the warehouse facility where the goods are stored;5

(2) the date of issue of the receipt;6

(3) the unique identification code of the receipt;7

(4) a statement whether the goods received will be delivered to the bearer, to a named8

person, or to a named person or its order;9

(5) the rate of storage and handling charges, but if goods are stored under a field10

warehousing arrangement, a statement of that fact is sufficient on a nonnegotiable receipt;11

(6) a description of the goods or the packages containing them;12

(7) the signature of the warehouse or its agent;13

(8) if the receipt is issued for goods that the warehouse owns, either solely, jointly, or14

in common with others, the fact of that ownership; and15

(9) a statement of the amount of advances made and of liabilities incurred for which16

the warehouse claims a lien or security interest, but if the precise amount of advances made or of17

liabilities incurred is, at the time of the issue of the receipt, unknown to the warehouse or to its18

agent that issued the receipt, a statement of the fact that advances have been made or liabilities19

incurred and the purpose of the advances or liabilities is sufficient.20

(c) A warehouse may insert in its receipt any terms that are not contrary to [the Uniform21

Commercial Code] and do not impair its obligation of delivery under Section 7-403 or its duty of22

18

care under Section 7-204. Any contrary provisions are ineffective.1



Changes: Language is updated to accommodate electronic commerce and to reflect modern6style.7

8Purposes:9

1. This section does not displace any particular legislation that requires other terms in a10warehouse receipt or that may require a particular form of a warehouse receipt. This section does11not require that a warehouse receipt be issued. A warehouse receipt that is issued need not12contain any of the terms listed in subsection (b) in order to qualify as a warehouse receipt as long13as the receipt falls within the definition of “warehouse receipt” in Article 1. The only14consequence of a warehouse receipt not containing any term listed in subsection (b) is that a15person injured by a term’s omission has a right as against the warehouse for harm caused by the16omission.17

2. The unique identification code referred to in subsection (b)(3) can include any18combination of letters, number, signs, and/or symbols that provide a unique identification. 19Whether an electronic or tangible warehouse receipt contains a signature will be resolved with20the definition of sign in Section 7-102.21

22Cross References: Sections 7-103 and 7-401.23

24Definitional Cross References:25"Bearer". Section 1-201.26"Delivery". Section 1-201.27"Goods". Section 7-102.28"Person". Section 1-201.29"Security interest". Section 1-201.30“Sign”. Section 7-102.31"Term". Section 1-201.32"Warehouse receipt". Section 1-201.33"Warehouse". Section 7-102.34

3536

SECTION 7-203. LIABILITY FOR NONRECEIPT OR MISDESCRIPTION. A party to37

or purchaser for value in good faith of a document of title, other than a bill of lading, that relies38

upon the description of the goods in the document may recover from the issuer damages caused39

19

by the nonreceipt or misdescription of the goods, except to the extent that:1

(1) the document conspicuously indicates that the issuer does not know whether all or2

part of the goods in fact were received or conform to the description, such as a case in which the3

description is in terms of marks or labels or kind, quantity, or condition, or the receipt or4

description is qualified by "contents, condition, and quality unknown", "said to contain", or5

words of similar import, if the indication is true; or6

(2) the party or purchaser otherwise has notice of the nonreceipt or misdescription.7



Changes: Changes to this section are for style only.1213

Purpose:14This section is a simplified restatement of existing law as to the method by which a bailee15

may avoid responsibility for the accuracy of descriptions which are made by or in reliance upon16information furnished by the depositor. The issuer is liable on documents issued by an agent,17contrary to instructions of its principal, without receiving goods. No disclaimer of the latter18liability is permitted.19


22Definitional Cross References:23"Conspicuous". Section 1-201.24"Document of title". Section 1-201.25"Goods". Section 7-102.26“Good Faith”. Section 1-201. [7-102]27"Issuer". Section 7-102.28"Notice". Section 1-202.29"Party". Section 1-201.30"Purchaser". Section 1-201.31"Receipt of goods". Section 2-103.32"Value". Section 1-204.33

34

20

SECTION 7-204. DUTY OF CARE; CONTRACTUAL LIMITATION OF1

WAREHOUSE’S LIABILITY.2

(a) A warehouse is liable for damages for loss of or injury to the goods caused by its 3

failure to exercise care with regard to the goods that a reasonably careful person would exercise4

under similar circumstances. However, unless otherwise agreed, the warehouse is not liable for5

damages that could not have been avoided by the exercise of that care.6

(b) Damages may be limited by a term in the warehouse receipt or storage agreement7

limiting the amount of liability in case of loss or damage beyond which the warehouse is not8

liable. Such a limitation is not effective with respect to the warehouse’s liability for conversion9

to its own use. The warehouse’s liability, on request of the bailor in a record at the time of10

signing such storage agreement or within a reasonable time after receipt of the warehouse receipt,11

may be increased on part or all of the goods covered by the storage agreement or the warehouse12

receipt. In this event, increased rates may be charged based on an increased valuation of the13

goods.14

(c) Reasonable provisions as to the time and manner of presenting claims and15

commencing actions based on the bailment may be included in the warehouse receipt or storage16

agreement.17

(d) This section does not impair or repeal [Insert reference to any statute that imposes a18

higher responsibility upon the warehouse or invalidates contractual limitations that would be19

permissible under this Article.]20



21

1Changes: Updated to reflect modern, standard commercial practices.2

3Purposes of Changes:4

1. Subsection (a) continues the rule from former Section 7-204 on the warehouse’s5obligation to exercise reasonable care without change.6

2. Former Section 7-204(2) required that the term limiting damages do so by setting forth a7specific liability per article or item or of a value per unit of weight. This requirement has been8deleted as out of step with modern industry practice. Under subsection (b) a warehouse may limit9its liability for damages for loss of or damage to the goods by a term in the warehouse receipt or10storage agreement. The parties cannot disclaim by contract the warehouse’s obligation of care. 11Section 1-302.12

3. Former Section 7-204(2) also provided that an increased rate can not be charged if contrary13to a tariff. That language has been deleted. If a tariff is required under state or federal law,14pursuant to Section 7-103(a), the tariff would control over the rule of this section allowing an15increased rate. The provisions of a non-mandatory tariff may be incorporated by reference in the16parties’ agreement. See Comment 2 to Section 7-103. Subsection (c) deletes the reference to17tariffs for the same reason that the reference has been omitted in subsection (b).18

4. As under former Section 7-204(2), subsection (b) provides that a limitation of damages is19ineffective if the warehouse has converted the goods to its own use. A mere failure to redeliver20the goods is not conversion to the warehouse’s own use. Conversion to its own use has a21specialized meaning in the case law that is narrower than the idea of conversion generally. 22

5. Storage agreements commonly establish the contractual relationship between warehouses23and depositors who have an on-going relationship. The storage agreement may allow for the24movement into and out of a warehouse without the necessity of issuing or amending a warehouse25receipt upon each entry or exit of goods from the warehouse. 26

27Cross References: Sections 1-302, 7-103, 7-309 and 7-403.28

29Definitional Cross References:30"Goods". Section 7-102.31"Reasonable time". Section 1-204.32"Sign". Section 7-102.33"Term". Section 1-201.34"Value". Section 1-204.35"Warehouse receipt". Section 1-201.36"Warehouse". Section 7-102.37

3839

SECTION 7-205. TITLE UNDER WAREHOUSE RECEIPT DEFEATED IN40

CERTAIN CASES. A buyer in ordinary course of business of fungible goods sold and41

22

delivered by a warehouse that is also in the business of buying and selling such goods takes the1

goods free of any claim under a warehouse receipt even if the receipt is negotiable and has been2

duly negotiated.3



Changes: Changes for style only.89

Purposes:101. The typical case covered by this section is that of the warehouse-dealer in grain, and the11

substantive question at issue is whether in case the warehouse becomes insolvent the receipt12holders shall be able to trace and recover grain shipped to farmers and other purchasers from the13elevator. This was possible under the old acts, although courts were eager to find estoppels to14prevent it. The practical difficulty of tracing fungible grain means that the preservation of this15theoretical right adds little to the commercial acceptability of negotiable grain receipts, which16really circulate on the credit of the warehouse. Moreover, on default of the warehouse, the17receipt holders at least share in what grain remains, whereas retaking the grain from a good faith18cash purchaser reduces the purchaser completely to the status of general creditor in a situation19where there was very little the purchaser could do to guard against the loss. Compare 15 U.S.C.20Section 714p enacted in 1955.21

2. This provision applies to both negotiable and nonnegotiable warehouse receipts. The22concept of due negotiation is provided for in 7-501. The definition of “buyer in ordinary course”23is in Article 1 and provides, among other things, that a buyer must either have possession or a24right to obtain the goods under Article 2 in order to be a buyer in ordinary course. This section25requires actual delivery of the fungible goods to the buyer in ordinary course. Delivery requires26voluntary transfer of possession of the fungible goods to the buyer. See amended Section 2-103. 27This section is not satisfied by the delivery of the document of title to the buyer in ordinary28course.29


32Definitional Cross References:33"Buyer in ordinary course of business". Section 1-201.34"Delivery". Section 1-201.35"Duly negotiate". Section 7-501.36"Fungible" goods. Section 1-201.37"Goods". Section 7-102.38"Value". Section 1-204.39"Warehouse receipt". Section 1-201.40

23

"Warehouse". Section 7-102.123

SECTION 7-206. TERMINATION OF STORAGE AT WAREHOUSE'S OPTION.4

(a) A warehouse, by giving notice to the person on whose account the goods are held and5

any other person known to claim an interest in the goods, may require payment of any charges6

and removal of the goods from the warehouse at the termination of the period of storage fixed by7

the document of title or, if a period is not fixed, within a stated period not less than 30 days after8

the warehouse gives notice. If the goods are not removed before the date specified in the notice,9

the warehouse may sell them pursuant to Section 7-210.10

(b) If a warehouse in good faith believes that goods are about to deteriorate or decline in11

value to less than the amount of its lien within the time provided in subsection (a) and Section 7-12

210, the warehouse may specify in the notice given under subsection (a) any reasonable shorter13

time for removal of the goods and, if the goods are not removed, may sell them at public sale14

held not less than one week after a single advertisement or posting.15

(c) If, as a result of a quality or condition of the goods of which the warehouse did not16

have notice at the time of deposit, the goods are a hazard to other property, the warehouse17

facilities, or other persons, the warehouse may sell the goods at public or private sale without18

advertisement or posting on reasonable notification to all persons known to claim an interest in19

the goods. If the warehouse, after a reasonable effort, is unable to sell the goods, it may dispose20

of them in any lawful manner and does not incur liability by reason of that disposition.21

(d) A warehouse shall deliver the goods to any person entitled to them under this article22

upon due demand made at any time before sale or other disposition under this section.23

24

(e) A warehouse may satisfy its lien from the proceeds of any sale or disposition under1

this section but shall hold the balance for delivery on the demand of any person to which the2

warehouse would have been bound to deliver the goods.3



Changes: Changes for style.89

Purposes:101. Most warehousing is for an indefinite term, the bailor being entitled to delivery on11

reasonable demand. It is necessary to define the warehouse's power to terminate the bailment,12since it would be commercially intolerable to allow warehouses to order removal of the goods on13short notice. The thirty day period provided where the document does not carry its own period of14termination corresponds to commercial practice of computing rates on a monthly basis. The right15to terminate under subsection (a) includes a right to require payment of "any charges", but does16not depend on the existence of unpaid charges.17

2. In permitting expeditious disposition of perishable and hazardous goods the pre-Code18Uniform Warehouse Receipts Act, Section 34, made no distinction between cases where the19warehouse knowingly undertook to store such goods and cases where the goods were discovered20to be of that character subsequent to storage. The former situation presents no such emergency as21justifies the summary power of removal and sale. Subsections (b) and (c) distinguish between22the two situations.23

3. Protection of its lien is the only interest which the warehouse has to justify summary sale24of perishable goods which are not hazardous. This same interest must be recognized when the25stored goods, although not perishable, decline in market value to a point which threatens the26warehouse's security.27

4. The right to order removal of stored goods is subject to provisions of the public28warehousing laws of some states forbidding warehouses from discriminating among customers. 29Nor does the section relieve the warehouse of any obligation under the state laws to secure the30approval of a public official before disposing of deteriorating goods. Such regulatory statutes31and the regulations under them remain in force and operative. Section 7-103.32


35Definitional Cross References:36"Delivery". Section 1-201.37“Document of title”. Section 1-102.38"Good faith". Section 1-201 [7-102].39"Goods". Section 7-102.40

25

"Notice". Section 1-202.1"Notification". Section 1-202.2"Person". Section 1-201.3"Reasonable time". Section 1-205.4"Value". Section 1-204.5 "Warehouse". Section 7-102.6

78

SECTION 7-207. GOODS MUST BE KEPT SEPARATE; FUNGIBLE GOODS.9

(a) Unless the warehouse receipt provides otherwise, a warehouse shall keep separate the10

goods covered by each receipt so as to permit at all times identification and delivery of those11

goods. However, different lots of fungible goods may be commingled.12

(b) If different lots of fungible goods are commingled, the good are owned in common by13

the persons entitled thereto and the warehouse is severally liable to each owner for that owner's14

share. If, because of overissue, a mass of fungible goods is insufficient to meet all the receipts15

the warehouse has issued against it, the persons entitled include all holders to which overissued16

receipts have been duly negotiated.17




Purposes:24 No change of substance is made from former Section 7-207. Holders to whom overissued25

receipts have been duly negotiated shall share in a mass of fungible goods. Where individual26ownership interests are merged into claims on a common fund, as is necessarily the case with27fungible goods, there is no policy reason for discriminating between successive purchasers of28similar claims.29

30Definitional Cross References:31"Delivery". Section 1-201.32"Duly negotiate". Section 7-501.33"Fungible goods". Section 1-201.34

26

"Goods". Section 7-102.1"Holder". Section 1-201.2"Person". Section 1-201.3"Warehouse receipt". Section 1-201.4"Warehouse". Section 7-102.5

67

SECTION 7-208. ALTERED WAREHOUSE RECEIPTS. If a blank in a negotiable8

tangible warehouse receipt has been filled in without authority, a good faith purchaser for value9

and without notice of the lack of authority may treat the insertion as authorized. Any other10

unauthorized alteration leaves any tangible or electronic warehouse receipt enforceable against11

the issuer according to its original tenor.12



Changes: To accommodate electronic documents of title.1718

Purpose:1920

1. The execution of tangible warehouse receipts in blank is a dangerous practice. As between21the issuer and an innocent purchaser the risks should clearly fall on the former. The purchaser22must have purchased the tangible negotiable warehouse receipt in good faith and for value to be23protected under the rule of the first sentence which is a limited exception to the general rule in24the second sentence. Electronic document of title systems should have protection against25unauthorized access and unauthorized changes. Thus the protection of the first sentence is not26necessary in the context of electronic documents.27

2. Under the second sentence of this section, an unauthorized alteration whether made with28or without fraudulent intent does not relieve the issuer of its liability on the warehouse receipt as29originally executed. The unauthorized alteration itself is of course ineffective against the30warehouse. This rule applies to both tangible and electronic warehouse receipts.31

32Definitional Cross References:33“Good faith”. Section 1-201 [7-102].34"Issuer". Section 7-102.35"Notice". Section 1-202.36"Purchaser". Section 1-201.37"Value". Section 1-204.38

27

"Warehouse receipt". Section 1-201.123

SECTION 7-209. LIEN OF WAREHOUSE.4

(a) A warehouse has a lien against the bailor on the goods covered by a warehouse receipt5

or storage agreement or on the proceeds thereof in its possession for charges for storage or6

transportation, including demurrage and terminal charges, insurance, labor, or other charges,7

present or future, in relation to the goods, and for expenses necessary for preservation of the8

goods or reasonably incurred in their sale pursuant to law. If the person on whose account the9

goods are held is liable for similar charges or expenses in relation to other goods whenever10

deposited and it is stated in the warehouse receipt or storage agreement that a lien is claimed for11

charges and expenses in relation to other goods, the warehouse also has a lien against the goods12

covered by the warehouse receipt or storage agreement or on the proceeds thereof in its13

possession for those charges and expenses, whether or not the other goods have been delivered14

by the warehouse. However, as against a person to which a negotiable warehouse receipt is duly15

negotiated, a warehouse’s lien is limited to charges in an amount or at a rate specified in the16

warehouse receipt or, if no charges are so specified, to a reasonable charge for storage of the17

specific goods covered by the receipt subsequent to the date of the receipt.18

(b) The warehouse may also reserve a security interest under Article 9 against the bailor19

for the maximum amount specified on the receipt for charges other than those specified in20

subsection (a), such as for money advanced and interest. A security interest is governed by21

Article 9.22

(c) A warehouse’s lien for charges and expenses under subsection (a) or a security interest23

28

under subsection (b) is also effective against any person that so entrusted the bailor with1

possession of the goods that a pledge of them by the bailor to a good faith purchaser for value2

would have been valid. However, the lien or security interest is not effective against a person3

that before issuance of a document of title had a legal interest or a perfected security interest in4

the goods and that did not:5

(1) deliver or entrust the goods or any document covering the goods to the bailor or6

the bailor’s nominee with actual or apparent authority to ship, store, or sell; or with power to7

obtain delivery under Section 7-403; or with power of disposition under Sections 2-403, 2A-8

304(2), 2A-305(2) or 9-320 or other statute or rule of law; or9

(2) acquiesce in the procurement by the bailor or its nominee of any document. 10

(d) A warehouse’s lien on household goods for charges and expenses in relation to the11

goods under subsection (a) is also effective against all persons if the depositor was the legal12

possessor of the goods at the time of deposit. In this subsection, “household goods” means13

furniture, furnishings, or personal effects used by the depositor in a dwelling.14

(e) A warehouse loses its lien on any goods that it voluntarily delivers or unjustifiably15

refuses to deliver.16


Prior Uniform Statutory Provision: Former Sections 7-209 and 7-503.1920

Changes: Expanded to recognize warehouse lien when a warehouse receipt is not issued but21goods are covered by a storage agreement.22

23Purposes:24

251. Subsection (a) defines the warehouse's statutory lien. Other than allowing a warehouse to26

claim a lien under this section when there is a storage agreement and not a warehouse receipt,27

29

this section remains unchanged in substance from former Section 7-209(1). Under the first1sentence, a specific lien attaches automatically without express notation on the receipt or storage2agreement with regard to goods stored under the receipt or the storage agreement. That lien is3limited to the usual charges arising out of a storage transaction. 4

Example 1: Bailor stored goods with a warehouse and the warehouse issued a warehouse5receipt. A lien against those goods arose as set forth in subsection (a), the first sentence, for the6charges for storage and the other expenses of those goods. The warehouse may enforce its lien7under Section 7-210 as against the bailor. Whether the warehouse receipt is negotiable or8nonnegotiable is not important to the warehouse’s rights as against the bailor.9

Under the second sentence, by notation on the receipt or storage agreement, the lien can be10made a general lien extending to like charges in relation to other goods. Both the specific lien11and general lien are as to goods in the possession of the warehouse and extend to proceeds from12the goods as long as the proceeds are in the possession of the warehouse. The same rules apply13whether the receipt is negotiable or non-negotiable.14

Example 2: Bailor stored goods (lot A) with a warehouse and the warehouse issued a15warehouse receipt for those goods. In the warehouse receipt it is stated that the warehouse will16also have a lien on goods covered by the warehouse receipt for storage charges and the other17expenses for any other goods that are stored with the warehouse by the bailor. The statement18about the lien on other goods does not specify an amount or a rate. Bailor then stored other19goods (lot B) with the warehouse. Under subsection (a), first sentence, the warehouse has a lien20on the specific goods (lot A) covered by the warehouse receipt. Under subsection (a), second21sentence, the warehouse has a lien on the goods in lot A for the storage charges and the other22expenses arising from the goods in lot B. That lien is enforceable as against the bailor regardless23of whether the receipt is negotiable or nonnegotiable.24

Under the third sentence, if the warehouse receipt is negotiable, the lien as against a holder of25that receipt by due negotiation is limited to the amount or rate specified on the receipt for the26specific lien or the general lien, or, if none is specified, to a reasonable charge for storage of the27specific goods covered by the receipt for storage after the date of the receipt.28

Example 3: Same facts as Example 1 except that the warehouse receipt is negotiable and has29been duly negotiated (Section 7-501) to a person other than the bailor. Under the last sentence of30subsection (a), the warehouse may enforce its lien against the bailor’s goods stored in the31warehouse as against the person to whom the negotiable warehouse receipt has been duly32negotiated. Section 7-502. That lien is limited to the charges or rates specified in the receipt or a33reasonable charge for storage as stated in the last sentence of subsection (a).34

Example 4: Same facts as Example 2 except that the warehouse receipt is negotiable and has35been duly negotiated (Section 7-501) to a person other than the bailor. Under the last sentence of36subsection (a), the lien on lot A goods for the storage charges and the other expenses arising from37storage of lot B goods is not enforceable as against the person to whom the receipt has been duly38negotiated. Without a statement of a specified amount or rate for the general lien, the39warehouse’s general lien is not enforceable as against the person to whom the negotiable40document has been duly negotiated. However, the warehouse lien for charges and expenses41related to storage of lot A goods is still enforceable as against the person to whom the receipt was42duly negotiated.43

30

Example 5. Same facts as Examples 2 and 4 except the warehouse had stated on the1negotiable warehouse receipt a specified amount or rate for the general lien on other goods (lot2B). Under the last sentence of subsection (a), the general lien on lot A goods for the storage3charges and the other expenses arising from storage of lot B goods is enforceable as against the4person to whom the receipt has been duly negotiated. 5

2. Subsection (b) provides for a security interest based upon agreement. Such a security6interest arises out of relations between the parties other than bailment for storage or7transportation, as where the bailee assumes the role of financier or performs a manufacturing8operation, extending credit in reliance upon the goods covered by the receipt. Such a security9interest is not a statutory lien. Compare Sections 9-109 and 9-333. It is governed in all respects10by Article 9, except that subsection (b) requires that the receipt specify a maximum amount and11limits the security interest to the amount specified. A warehouse could also take a security12interest to secure its charges for storage and the other expenses listed in subsection (a) to protect13these claims upon the loss of the statutory possessory warehouse lien if the warehouse loses14possession of the goods as provided in subsection (e).15

Example 6: Bailor stores goods with a warehouse and the warehouse issues a warehouse16receipt that states that the warehouse is taking a security interest in the bailed goods for charges17of storage, expenses, for money advanced, for manufacturing services rendered, and all other18obligations that the bailor may owe the warehouse. That is a security interest covered in all19respects by Article 9. Subsection (b). As allowed by this section, a warehouse may rely upon its20statutory possessory lien to protect its charges for storage and the other expenses related to21storage. For those storage charges covered by the statutory possessory lien, the warehouse is not22required to use a security interest under subsection (b).23

3. Subsections (a) and (b) validate the lien and security interest "against the bailor." Under24basic principles of derivative rights as provided in Section 7-504, the warehouse lien is also valid25as against parties who obtain their rights from the bailor except as otherwise provided in26subsection (a), third sentence, or subsection (c). 27

Example 7: Bailor stores goods with a warehouse and the warehouse issues a nonnegotiable28warehouse receipt that also claims a general lien in other goods stored with the warehouse. A29lien on the bailed goods for the charges for storage and the other expenses arises under30subsection (a). Bailor notifies the warehouse that the goods have been sold to Buyer and the31bailee acknowledges that fact to the Buyer. Section 2-503. The warehouse lien for storage of32those goods is effective against Buyer for both the specific lien and the general lien. Section 7-33504.34

Example 8: Bailor stores goods with a warehouse and the warehouse issues a nonnegotiable35warehouse receipt. A lien on the bailed goods for the charges for storage and the other expenses36arises under subsection (a). Bailor grants a security interest in the goods while the goods are in37the warehouse’s possession to Secured Party (SP) who properly perfects a security interest in the38goods. See Revised 9-312(d). The warehouse lien is superior in priority over SP’s security39interest. See Revised 9-203(b)(2) (debtor can grant a security interest to the extent of debtor’s40rights in the collateral).41

Example 9: Bailor stores goods with a warehouse and the warehouse issues a negotiable42warehouse receipt. A lien on the bailed goods for the charges for storage and the other expenses43

31

arises under subsection (a). Bailor grants a security interest in the negotiable document to SP. 1SP properly perfects its interest in the negotiable document by taking possession through a ‘due2negotiation.’ Revised 9-312(c). SP’s security interest is subordinate to the warehouse lien. 3Section 7-209(a), third sentence. Given that bailor’s rights are subject to the warehouse lien, the4bailor cannot grant to the SP greater rights than the bailor has under Section 9-203(b)(2),5perfection of the security interest in the negotiable document and the goods covered by the6document through SP’s filing of a financing statement should not give a different result.7

As against third parties who have interests in the goods prior to the storage with the8warehouse, subsection (c) continues the rule under the prior uniform statutory provision that to9validate the lien or security interest of the warehouse, the owner must have entrusted the goods to10the depositor, and that the circumstances must be such that a pledge by the depositor to a good11faith purchaser for value would have been valid. Thus the owner's interest will not be subjected12to a lien or security interest arising out of a deposit of its goods by a thief. The warehouse may be13protected because of the actual, implied or apparent authority of the depositor, because of a14Factor's Act, or because of other circumstances which would protect a bona fide pledgee, unless15those circumstances are denied effect under the second sentence of subsection (c). The language16of Section 7-503 is brought into subsection (c) for purposes of clarity. The comments to Section177-503 are helpful in interpreting delivery, entrustment or acquiescence.18

Where the third party is the holder of a security interest, obtained prior to the issuance of a19negotiable warehouse receipt, the rights of the warehouse depend on the priority given to a20hypothetical bona fide pledgee by Article 9, particularly Section 9-322. Thus the special priority21granted to statutory liens by Section 9-333 does not apply to liens under subsection (a) of this22section, since subsection (c), second sentence, "expressly provides otherwise" within the meaning23of Section 9-333.24

As to household goods, however, subsection (d) makes the warehouse’s lien "for charges and25expenses in relation to the goods" effective against all persons if the depositor was the legal26possessor. The purpose of the exception is to permit the warehouse to accept household goods27for storage in sole reliance on the value of the goods themselves, especially in situations of28family emergency. 29

Example 10: Bailor grants a perfected security interest in the goods to SP prior to storage of30the goods with the warehouse. Bailor then stores goods with the warehouse and the warehouse31issues a warehouse receipt for the goods. A warehouse lien on the bailed goods for the charges32for storage or other expenses arises under subsection (a). The warehouse lien is not effective as33against SP unless SP entrusted the goods to the bailor with actual or apparent authority to ship34store, or sell the goods or with power of disposition under subsection (c)(1) or acquiesced in the35bailor’s procurement of a document of title under subsection (c)(2). This result obtains whether36the receipt is negotiable or nonnegotiable.37

Example 11: Sheriff who had lawfully repossessed household goods in an eviction action38stored the goods with a warehouse. A lien on the bailed goods arises under subsection (a). The39lien is effective as against the owner of the goods. Subsection (d). 40

4. As under previous law, this section creates a statutory possessory lien in favor of the41warehouse on the goods stored with the warehouse or on the proceeds of the goods. The42warehouse loses its lien if it loses possession of the goods or the proceeds. Subsection (e).43

32

5. Where goods have been stored under a non-negotiable warehouse receipt and are sold by1the person to whom the receipt has been issued, frequently the goods are not withdrawn by the2new owner. The obligations of the seller of the goods in this situation are set forth in Section32-503(4) on tender of delivery and include procurement of an acknowledgment by the bailee of4the buyer's right to possession of the goods. If a new receipt is requested, such an5acknowledgment can be withheld until storage charges have been paid or provided for. The6statutory lien for charges on the goods sold, granted by the first sentence of subsection (a),7continues valid unless the bailee gives it up. See Section 7-403. But once a new receipt is issued8to the buyer, the buyer becomes "the person on whose account the goods are held" under the9second sentence of subsection (a); unless the buyer undertakes liability for charges in relation to10other goods stored by the seller, there is no general lien against the buyer for such charges. Of11course, the bailee may preserve the general lien in such a case either by an arrangement by which12the buyer "is liable for" such charges, or by reserving a security interest under subsection (b).13

6. A possessory warehouse lien arises as provided under subsection (a) if the parties to the14bailment have a storage agreement or a warehouse receipt is issued. In the modern warehouse,15the bailor and the bailee may enter into a master contract governing the bailment with the bailee16and bailor keeping track of the goods stored pursuant to the master contract by notation on their17respective books and records and the parties send notification via electronic communication as to18what goods are covered by the master contract. Warehouse receipts are not issued. See19Comment 4 to Section 7-204. There is no particular form for a warehouse receipt and failure to20contain any of the terms listed in Section 7-202 does not deprive the warehouse of its lien that21arises under subsection (a).22

23Cross References:24Point 1: Sections 7-501 and 7-502.25Point 2: Sections 9-109 and 9-333.26Point 3: Sections 2-503, 7-503, 7-504, 9-203, 9-312, and 9-322 .27Point 4: Sections 2-503, 7-501, 7-502, 7-504, 9-312, 9-331, 9-333, 9-401.28Point 5: Sections 2-503 and 7-403.29Point 6: Sections 7-202 and 7-204.30

31Definitional Cross References:32"Deliver". Section 1-201.33“Document of Title”. Section 1-20134"Goods". Section 7-102.35"Money". Section 1-201.36"Person". Section 1-201.37"Purchaser". Section 1-201.38"Right". Section 1-201.39"Security interest". Section 1-201.40"Value". Section 1-204.41"Warehouse receipt". Section 1-201.42"Warehouse". Section 7-102.43

33

1SECTION 7-210. ENFORCEMENT OF WAREHOUSE'S LIEN.2

(a) Except as otherwise provided in subsection (b), a warehouse’s lien may be enforced3

by public or private sale of the goods, in bulk or in packages, at any time or place and on any4

terms that are commercially reasonable, after notifying all persons known to claim an interest in5

the goods. The notification must include a statement of the amount due, the nature of the6

proposed sale, and the time and place of any public sale. The fact that a better price could have7

been obtained by a sale at a different time or in a different method from that selected by the8

warehouse is not of itself sufficient to establish that the sale was not made in a commercially9

reasonable manner. The warehouse has sold in a commercially reasonable manner if the10

warehouse sells the goods in the usual manner in any recognized market therefor, sells at the11

price current in that market at the time of the sale, or has otherwise sold in conformity with12

commercially reasonable practices among dealers in the type of goods sold. A sale of more13

goods than apparently necessary to be offered to ensure satisfaction of the obligation is not14

commercially reasonable, except in cases covered by the preceding sentence.15

(b) A warehouse's lien on goods, other than goods stored by a merchant in the course of16

its business, may be enforced only if the following requirements are satisfied:17

(1) All persons known to claim an interest in the goods must be notified.18

(2) The notification must include an itemized statement of the claim, a description of19

the goods subject to the lien, a demand for payment within a specified time not less than 10 days20

after receipt of the notification, and a conspicuous statement that unless the claim is paid within21

that time the goods will be advertised for sale and sold by auction at a specified time and place.22

34

(3) The sale must conform to the terms of the notification.1

(4) The sale must be held at the nearest suitable place to where the goods are held or2

stored.3

(5) After the expiration of the time given in the notification, an advertisement of the4

sale must be published once a week for two weeks consecutively in a newspaper of general5

circulation where the sale is to be held. The advertisement must include a description of the6

goods, the name of the person on whose account the goods are being held, and the time and place7

of the sale. The sale must take place at least 15 days after the first publication. If there is no8

newspaper of general circulation where the sale is to be held, the advertisement must be posted at9

least 10 days before the sale in not less than six conspicuous places in the neighborhood of the10

proposed sale.11

(c) Before any sale pursuant to this section, any person claiming a right in the goods may12

pay the amount necessary to satisfy the lien and the reasonable expenses incurred in complying13

with this section. In that event, the goods may not be sold but must be retained by the warehouse14

subject to the terms of the receipt and this article.15

(d) A warehouse may buy at any public sale held pursuant to this section.16

(e) A purchaser in good faith of goods sold to enforce a warehouse's lien takes the goods17

free of any rights of persons against which the lien was valid, despite the warehouse’s18

noncompliance with this section.19

(f) A warehouse may satisfy its lien from the proceeds of any sale pursuant to this section20

but shall hold the balance, if any, for delivery on demand to any person to which the warehouse21

would have been bound to deliver the goods.22

35

(g) The rights provided by this section are in addition to all other rights allowed by law to1

a creditor against a debtor.2

(h) If a lien is on goods stored by a merchant in the course of its business, the lien may be3

enforced in accordance with subsection (a) or (b).4

(i) A warehouse is liable for damages caused by failure to comply with the requirements5

for sale under this section and, in case of willful violation, is liable for conversion.6



Changes: Update to accommodate electronic commerce and for style.1112

Purposes:1314

1. Subsection (a) makes "commercial reasonableness" the standard for foreclosure15proceedings in all cases except non-commercial storage with a warehouse. The latter category16embraces principally storage of household goods by private owners; and for such cases the17detailed provisions as to notification, publication and public sale are retained in subsection (b)18with one change. The requirement in former Section 7-210(2)(b) that the notification must be19sent in person or by registered or certified mail has been deleted. Notification may be sent by any20reasonable means as provided in Section 1-202. The swifter, more flexible procedure of21subsection (a) is appropriate to commercial storage. Compare seller's power of resale on breach22by buyer under the provisions of the Article on Sales (Section 2-706). Commercial23reasonableness is a flexible concept that allows for a wide variety of actions to satisfy the rule of24this section, including electronic means of posting and sale.25

2. The provisions of subsections (d) and (e) permitting the bailee to bid at public sales and26confirming the title of purchasers at foreclosure sales are designed to secure more bidding and27better prices and remain unchanged from former Section 7-210.28

3. A warehouses may have recourse to an interpleader action in appropriate circumstances. 29See Section 7-603.30

4. If a warehouse has both a warehouse lien and a security interest, the warehouse may31enforce both the lien and the security interest simultaneously by using the procedures of Article329. Section 7-210 adopts as its touchstone “commercial reasonableness” for the enforcement of a33warehouse lien. Following the procedures of Article 9 satisfies “commercial reasonableness.”34

35Cross Reference: Sections 2-706, 7-403, 7-603 and Part 6 of Article 9.36

37

36

Definitional Cross References:1"Bill of lading". Section 1-201.2"Conspicuous". Section 1-201.3"Creditor". Section 1-201.4"Delivery". Section 1-201.5“Document of Title”. Section 1-201.6"Good faith". Section 1-201 [7-102].7"Goods". Section 7-102.8"Notification". Section 1-202.9"Notifies". Section 1-202.10"Person". Section 1-201.11"Purchaser". Section 1-201.12"Rights". Section 1-201.13"Term". Section 1-201.14"Warehouse". Section 7-102.15

1617

37

PART 31

BILLS OF LADING: SPECIAL PROVISIONS2

3

SECTION 7-301. LIABILITY FOR NONRECEIPT OR MISDESCRIPTION; "SAID4

TO CONTAIN"; "SHIPPER'S LOAD AND COUNT"; IMPROPER HANDLING.5

(a) A consignee of a nonnegotiable bill of lading which has given value in good faith, or a6

holder to which a negotiable bill has been duly negotiated, relying upon the description of the7

goods in the bill or upon the date shown in the bill, may recover from the issuer damages caused8

by the misdating of the bill or the nonreceipt or misdescription of the goods, except to the extent9

that the document of title indicates that the issuer does not know whether any part or all of the10

goods in fact were received or conform to the description, such as in a case in which the11

description is in terms of marks or labels or kind, quantity, or condition or the receipt or12

description is qualified by "contents or condition of contents of packages unknown", "said to13

contain", "shipper's weight, load and count," or words of similar import, if that indication is true.14

(b) If goods are loaded by the issuer of the bill of lading, the issuer shall count the15

packages of goods if shipped in packages and ascertain the kind and quantity if shipped in bulk16

and words such as "shipper's weight, load and count," or words of similar import indicating that17

the description was made by the shipper are ineffective except as to goods concealed by18

packages.19

(c) If bulk goods are loaded by a shipper that makes available to the issuer of the bill of20

lading adequate facilities for weighing those goods, the issuer shall ascertain the kind and21

quantity within a reasonable time after receiving the shipper’s request in a record to do so. In22

38

that case, "shipper's weight" or words of similar import are ineffective.1

(d) The issuer, by including in the bill of lading the words "shipper's weight, load and2

count," or words of similar import, may indicate that the goods were loaded by the shipper, and,3

if that statement is true, the issuer is not liable for damages caused by the improper loading.4

However, omission of such words does not imply liability for damages caused by improper5

loading.6

(e) A shipper guarantees to the issuer the accuracy at the time of shipment of the7

description, marks, labels, number, kind, quantity, condition, and weight, as furnished by the8

shipper, and the shipper shall indemnify the issuer against damage caused by inaccuracies in9

those particulars. This right of the issuer to that indemnity does not limit its responsibility or10

liability under the contract of carriage to any person other than the shipper.11



Changes: Changes for clarity, style and to recognize deregulation in the transportation industry.1617

Purposes:181. This section continues the rules from former Section 7-301 with one substantive change. 19

The obligations of the issuer of the bill of lading under former subsections (2) and (3) were20limited to issuers who were common carriers. Subsections (b) and (c) apply the same rules to all21issuers not just common carriers. This section is compatible with the policies stated in the22federal Bills of Lading Act, 49 U.S.C. § 80113 (2000).23

2. The language of the pre-Code Uniform Bills of Lading Act suggested that a carrier is24ordinarily liable for damage caused by improper loading, but may relieve itself of liability by25disclosing on the bill that shipper actually loaded. A more accurate statement of the law is that26the carrier is not liable for losses caused by act or default of the shipper, which would include27improper loading. There was some question whether under pre-Code law a carrier was liable28even to a good faith purchaser of a negotiable bill for such losses, if the shipper's faulty loading29in fact caused the loss. Subsection (d) permits the carrier to bar, by disclosure of shipper's30loading, liability to a good faith purchaser. There is no implication that decisions such as31Modern Tool Corp. v. Pennsylvania R. Co., 100 F.Supp. 595 (D.N.J.1951), are disapproved.32

39

3. This section is a restatement of existing law as to the method by which a bailee may avoid1responsibility for the accuracy of descriptions which are made by or in reliance upon information2furnished by the depositor or shipper. The wording in this section – “contents or condition of3contents of packages unknown” or “shipper’s weight, load and count” – to indicate that the4shipper loaded the goods or that the carrier does not know the description, condition, or contents5of the loaded packages continues to be appropriate as commonly understood in the transportation6industry. The reasons for this wording are as important in 2002 as when the prior section initially7was approved. The issuer is liable on documents issued by an agent, contrary to instructions of8his principal, without receiving goods. No disclaimer of this liability is permitted since it is not a9matter either of the care of the goods or their description.10

4. The shipper's erroneous report to the carrier concerning the goods may cause damage to the11carrier. Subsection (e) therefore provides appropriate indemnity.12

5. The word “freight” in the former Section 7-301 has been changed to “goods” to conform13to international and domestic land transport usage in which “freight” means the price paid for14carriage of the goods and not the goods themselves. Hence, changing the word “freight” to the15word “goods” is a clarifying change that fits both international and domestic practice.16

17Cross References: Sections 7-203, 7-309 and 7-501.18

19Definitional Cross References:20"Bill of lading". Section 1-201.21"Consignee". Section 7-102.22“Document of Title”. Section 1-201.23"Duly negotiate". Section 7-501.24"Good faith". Section 1-201.25"Goods". Section 7-102.26"Holder". Section 1-201.27"Issuer". Section 7-102.28"Notice". Section 1-202.29"Party". Section 1-201.30"Purchaser." Section 1-201.31"Receipt of Goods". Section 2-103.32"Value". Section 1-204.33

3435

SECTION 7-302. THROUGH BILLS OF LADING AND SIMILAR DOCUMENTS OF36

TITLE.37

(a) The issuer of a through bill of lading or other document of title embodying an38

undertaking to be performed in part by a person acting as its agent or by a performing carrier is39

40

liable to any person entitled to recover on the document for any breach by the other person or the1

performing carrier of its obligation under the document. However, to the extent that the bill2

covers an undertaking to be performed overseas or in territory not contiguous to the continental3

United States or an undertaking including matters other than transportation, this liability for4

breach by the other person or the performing carrier may be varied by agreement of the parties.5

(b) If goods covered by a through bill of lading or other document of title embodying an6

undertaking to be performed in part by a person other than the issuer are received by that person,7

the person is subject, with respect to its own performance while the goods are in its possession,8

to the obligation of the issuer. The person’s obligation is discharged by delivery of the goods to9

another person pursuant to the document and does not include liability for breach by any other10

person or by the issuer.11

(c) The issuer of a through bill of lading or other document of title described in12

subsection (a) is entitled to recover from the performing carrier, or other person in possession of13

the goods when the breach of the obligation under the document occurred:14

(1) the amount it may be required to pay to any person entitled to recover on the15

document for the breach, as may be evidenced by any receipt, judgment, or transcript of16

judgment, and;17

(2) the amount of any expense reasonably incurred by the issuer in defending any18

action commenced by any person entitled to recover on the document for the breach.19



Changes: To conform to current terminology and for style.24

41

1Purposes:2

1. This section continues the rules from former Section 7-302 without substantive change. 3The term “performing carrier” is substituted for the term “connecting carrier” to conform the4terminology of this section with terminology used in recent UNCITRAL and OAS proposals5concerning transportation and through bills of lading. This change in terminology is not6substantive. This section is compatible with liability on carriers under federal law. See 497U.S.C. § 14706.8

The purpose of this section is to subject the initial carrier under a through bill to suit for9breach of the contract of carriage by any performing carrier and to make it clear that any such10performing carrier holds the goods on terms which are defined by the document of title even11though such performing carrier did not issue the document. Since the performing carrier does12hold the goods on the terms of the document, it must honor a proper demand for delivery or a13diversion order just as the original bailee would have to. Similarly it has the benefits of the14excuses for non-delivery and limitations of liability provided for the original bailee who issued15the bill. Unlike the original bailee-issuer, the performing carrier's responsibility is limited to the16period while the goods are in its possession. The section does not impose any obligation to issue17through bills. 18

2. The reference to documents other than through bills looks to the possibility that19multi-purpose documents may come into use, e.g., combination warehouse receipts and bills of20lading. As electronic documents of title come into common usage, storage documents (e.g.21warehouse receipts) and transportation documents (e.g. bills of lading) may merge seamlessly22into one electronic document that can serve both the storage and transportation segments of the23movement of goods.24

3. Under subsection (a) the issuer of a through bill of lading may become liable for the fault25of another person. Subsection (c) gives the issuer appropriate rights of recourse.26

4. Despite the broad language of subsection (a), Section 7-302 is subject to preemption by27federal laws and treaties. Section 7-103. The precise scope of federal preemption in the28transportation sector is a question determined under federal law.29

30Cross reference: Section 7-10331

32Definitional Cross References:33"Agreement". Section 1-201.34"Bailee". Section 7-102.35"Bill of lading". Section 1-201.36"Delivery". Section 1-201.37“Document of title”. Section 1-201.38"Goods". Section 7-102.39"Issuer". Section 7-102.40"Party". Section 1-201.41"Person". Section 1-201.42

43

42

SECTION 7-303. DIVERSION; RECONSIGNMENT; CHANGE OF1

INSTRUCTIONS.2

(a) Unless the bill of lading otherwise provides, a carrier may deliver the goods to a3

person or destination other than that stated in the bill or may otherwise dispose of the goods,4

without liability for misdelivery, on instructions from:5

(1) the holder of a negotiable bill; 6

(2) the consignor on a nonnegotiable bill even if the consignee has given contrary7

instructions; 8

(3) the consignee on a nonnegotiable bill in the absence of contrary instructions from9

the consignor, if the goods have arrived at the billed destination or if the consignee is in10

possession of the tangible bill or in control of the electronic bill; or11

(4) the consignee on a nonnegotiable bill, if the consignee is entitled as against the12

consignor to dispose of the goods.13

(b) Unless instructions described in subsection (a) are included in a negotiable bill of14

lading, a person to which the bill is duly negotiated may hold the bailee according to the original15

terms.16



Changes: To accommodate electronic documents and for style.2122

Purposes:2324

1. Diversion is a very common commercial practice which defeats delivery to the consignee25originally named in a bill of lading. This section continues former Section 7-303's safe harbor26rules for carriers in situations involving diversion and adapts those rules to electronic documents27

43

of title. This section works compatibly with Section 2-705. Carriers may as a business matter be1willing to accept instructions from consignees in which case the carrier will be liable for2misdelivery if the consignee was not the owner or otherwise empowered to dispose of the goods3under subsection (a)(4). The section imposes no duty on carriers to undertake diversion. The4carrier is of course subject to the provisions of mandatory filed tariffs as provided in Section57-103.6

2. It should be noted that the section provides only an immunity for carriers against liability7for "misdelivery." It does not, for example, defeat the title to the goods which the8consignee-buyer may have acquired from the consignor-seller upon delivery of the goods to the9carrier under a nonnegotiable bill of lading. Thus if the carrier, upon instructions from the10consignor, returns the goods to the consignor, the consignee may recover the goods from the11consignor or the consignor’s insolvent estate. However, under certain circumstances, the12consignee's title may be defeated by diversion of the goods in transit to a different consignee. 13The rights that arise between the consignor-seller and the consignee-buyer out of a contract for14the sale of goods are governed by Article 2.15

16Cross References:17Point 1: Sections 2-705 and 7-103.18Point 2: Article 2, Sections 7-403 and 7-504(3).19

20Definitional Cross References:21"Bailee". Section 7-102.22"Bill of lading". Section 1-201.23“Carrier”. Section 7-10224"Consignee". Section 7-102.25"Consignor". Section 7-102.26"Delivery". Section 1-201.27"Goods". Section 7-102.28"Holder". Section 1-201.29"Notice". Section 1-202.30"Person". Section 1-201.31"Purchaser". Section 1-201.32"Term". Section 1-201.33

3435

SECTION 7-304. TANGIBLE BILLS OF LADING IN A SET.36

(a) Except as customary in international transportation, a tangible bill of lading may not37

be issued in a set of parts. The issuer is liable for damages caused by violation of this subsection.38

(b) If a tangible bill of lading is lawfully issued in a set of parts, each of which contains39

44

an identification code and is expressed to be valid only if the goods have not been delivered1

against any other part, the whole of the parts constitutes one bill.2

(c) If a tangible negotiable bill of lading is lawfully issued in a set of parts and different3

parts are negotiated to different persons, the title of the holder to which the first due negotiation4

is made prevails as to both the document of title and the goods even if any later holder may have5

received the goods from the carrier in good faith and discharged the carrier's obligation by6

surrendering its part.7

(d) A person that negotiates or transfers a single part of a tangible bill of lading issued in8

a set is liable to holders of that part as if it were the whole set.9

(e) The bailee is obliged to deliver in accordance with Part 4 against the first presented10

part of a tangible bill of lading lawfully issued in a set. Delivery in this manner discharges the11

bailee's obligation on the whole bill.12



Changes: To limit bills in a set to tangible bills of lading and to use terminology more consistent17with modern usage.18

19Purposes:20

211. Tangible bills of lading in a set are still used in some nations in international trade. 22

Consequently, a tangible bill of lading part of a set could be at issue in a lawsuit that might come23within Article 7. The statement of the legal effect of a lawfully issued set is in accord with24existing commercial law relating to maritime and other international tangible bills of lading. 25This law has been codified in the Hague and Warsaw Conventions and in the Carriage of Goods26by Sea Act, the provisions of which would ordinarily govern in situations where bills in a set are27recognized by this Article. Tangible bills of lading in a set are prohibited in domestic trade.28

2. Electronic bills of lading in domestic or international trade will not be issued in a set given29the requirements of control necessary to deliver the bill to another person. An electronic bill of30lading will be a single, authoritative copy. Section 7-106. Hence, this section differentiates31

45

between electronic bills of lading and tangible bills of lading. This section does not prohibit1electronic data messages about goods in transit because these electronic data messages are not the2issued bill of lading. Electronic data messages contain information for the carrier’s management3and handling of the cargo but this information for the carrier’s use is not the issued bill of lading.4

5Cross Reference: Section 7-103, 7-303 and 7-106.6

7Definitional Cross References:8"Bailee". Section 7-102.9"Bill of lading". Section 1-201.10"Delivery". Section 1-201.11“Document of title”. Section 1-201.12"Duly negotiate". Section 7-501.13"Good faith". Section 1-201.14"Goods". Section 7-102.15"Holder". Section 1-201.16"Issuer". Section 7-102.17"Person". Section 1-201.18"Receipt of goods". Section 2-103.19

2021

SECTION 7-305. DESTINATION BILLS.22

(a) Instead of issuing a bill of lading to the consignor at the place of shipment, a carrier, at23

the request of the consignor, may procure the bill to be issued at destination or at any other place24

designated in the request.25

(b) Upon request of any person entitled as against a carrier to control the goods while in26

transit and on surrender of possession or control of any outstanding bill of lading or other receipt27

covering the goods, the issuer, subject to Section 7-105, may procure a substitute bill to be issued28

at any place designated in the request.29



Changes: To accommodate electronic bills of lading and for style.34

46

1Purposes:2

31. Subsection (a) continues the rules of former Section 7-305(1) without substantive change. 4

This proposal is designed to facilitate the use of order bills in connection with fast shipments. 5Use of order bills on high speed shipments is impeded by the fact that the goods may arrive at6destination before the documents, so that no one is ready to take delivery from the carrier. This7is especially inconvenient for carriers by truck and air, who do not have terminal facilities where8shipments can be held to await the consignee's appearance. Order bills would be useful to take9advantage of bank collection. This may be preferable to C.O.D. shipment in which the carrier,10e.g. a truck driver, is the collecting and remitting agent. Financing of shipments under this plan11would be handled as follows: seller at San Francisco delivers the goods to an airline with12instructions to issue a bill in New York to a named bank. Seller receives a receipt embodying13this undertaking to issue a destination bill. Airline wires its New York freight agent to issue the14bill as instructed by the seller. Seller wires the New York bank a draft on buyer. New York bank15indorses the bill to buyer when the buyer honors the draft. Normally seller would act through its16own bank in San Francisco, which would extend credit in reliance on the airline's contract to17deliver a bill to the order of its New York correspondent. This section is entirely permissive; it18imposes no duty to issue such bills. Whether a performing carrier will act as issuing agent is left19to agreement between carriers.20

2. Subsection (b) continues the rule from former Section 7-305(2) with accommodation for21electronic bills of lading. If the substitute bill changes from an electronic to a tangible medium22or vice versa, the issuance of the substitute bill must comply with Section 7-105 to give the23substitute bill validity and effect.24


27Definitional Cross References:28"Bill of lading". Section 1-201.29"Consignor". Section 7-102.30"Goods". Section 7-102.31"Issuer". Section 7-102.32"Receipt of goods". Section 2-103.33

343536

SECTION 7-306. ALTERED BILLS OF LADING. An unauthorized alteration or filling37

in of a blank in a bill of lading leaves the bill enforceable according to its original tenor.38



47

1Changes: None2

3Purposes:4

An unauthorized alteration or filling in of a blank, whether made with or without fraudulent5intent, does not relieve the issuer of his liability on the document as originally executed. This6section applies to both tangible and electronic bills of lading, applying the same rule to both7types of bills of lading. The control concept of Section 7-106 requires that any changes to the8electronic document of title be readily identifiable as authorized or unauthorized. Section 7-3069should be compared to Section 7-208 where a different rule applies to the unauthorized filling in10of a blank for tangible warehouse receipts.11

12Cross Reference: Sections 7-106 and 7-208.13

14Definitional Cross References:15"Bill of lading". Section 1-201.16"Issuer". Section 7-102.17

1819

SECTION 7-307. LIEN OF CARRIER.20

(a) A carrier has a lien on the goods covered by a bill of lading or on the proceeds thereof21

in its possession for charges after the date of the carrier’s receipt of the goods for storage or22

transportation, including demurrage and terminal charges, and for expenses necessary for23

preservation of the goods incident to their transportation or reasonably incurred in their sale24

pursuant to law. However, against a purchaser for value of a negotiable bill of lading, a carrier's25

lien is limited to charges stated in the bill or the applicable tariffs or, if no charges are stated, a26

reasonable charge.27

(b) A lien for charges and expenses under subsection (a) on goods that the carrier was28

required by law to receive for transportation is effective against the consignor or any person29

entitled to the goods unless the carrier had notice that the consignor lacked authority to subject30

the goods to those charges and expenses. Any other lien under subsection (a) is effective against31

48

the consignor and any person that permitted the bailor to have control or possession of the goods1

unless the carrier had notice that the bailor lacked authority.2

(c) A carrier loses its lien on any goods that it voluntarily delivers or unjustifiably refuses3

to deliver.4



Changes: Expanded to cover proceeds of the goods transported.910

Purposes:1112

1. The section is intended to give carriers a specific statutory lien for charges and expenses13similar to that given to warehouses by the first sentence of Section 7-209(a) and extends that lien14to the proceeds of the goods as long as the carrier has possession of the proceeds. But because15carriers do not commonly claim a lien for charges in relation to other goods or lend money on the16security of goods in their hands, provisions for a general lien or a security interest similar to those17in Section 7-209(a) and (b) are omitted. Carriers may utilize Article 9 to obtain a security18interest and become a secured party or a carrier may agree to limit its lien rights in a19transportation agreement with the shipper. As the lien given by this section is specific, and the20storage or transportation often preserves or increases the value of the goods, subsection (b)21validates the lien against anyone who permitted the bailor to have possession of the goods.22Where the carrier is required to receive the goods for transportation, the owner's interest may be23subjected to charges and expenses arising out of deposit of his goods by a thief. The crucial24mental element is the carrier's knowledge or reason to know of the bailor's lack of authority. If25the carrier does not know or have reason to know of the bailor’s lack of authority, the carrier has26a lien under this section against any person so long as the conditions of subsection (b) are27satisfied. In light of the crucial mental element, Sections 7-307 and 9-333 combine to give28priority to a carrier’s lien over security interests in the goods. In this regard, the judicial decision29in In re Sharon Steel Corp., 25 U.C.C. Rep.2d 503, 176 B.R. 384 (W.D. Pa. 1995) is correct and30is the controlling precedent.31

2. The reference to charges in this section means charges relating to the bailment relationship32for transportation. Charges does not mean that the bill of lading must state a specific rate or a33specific amount. However, failure to state a specific rate or a specific amount has legal34consequences under the second sentence of subsection (a).35

3. The carrier’s specific lien under this section is a possessory lien. See subsection (c). Part363 of Article 7 does not require any particular form for a bill of lading. The carrier’s lien arises37when the carrier has issued a bill of lading.38

39

49

Cross References:1Point 1: Sections 7-209, 9-109 and 9-333.2Point 3. Section 7-202 and 7-209.3

4Definitional Cross References:5"Bill of lading". Section 1-201.6“Carrier”. Section 7-102.7"Consignor". Section 7-102.8"Delivery". Section 1-201.9"Goods". Section 7-102.10"Person". Section 1-201.11"Purchaser". Section 1-201.12"Value". Section 1-204.13

1415

SECTION 7-308. ENFORCEMENT OF CARRIER'S LIEN.16

(a) A carrier's lien on goods may be enforced by public or private sale of the goods, in17

bulk or in packages, at any time or place and on any terms that are commercially reasonable, after18

notifying all persons known to claim an interest in the goods. The notification must include a19

statement of the amount due, the nature of the proposed sale, and the time and place of any20

public sale. The fact that a better price could have been obtained by a sale at a different time or21

in a different method from that selected by the carrier is not of itself sufficient to establish that22

the sale was not made in a commercially reasonable manner. The carrier has sold goods in a23

commercially reasonable manner if the carrier sells the goods in the usual manner in any24

recognized market therefor, sells at the price current in that market at the time of the sale, or has25

otherwise sold in conformity with commercially reasonable practices among dealers in the type26

of goods sold. A sale of more goods than apparently necessary to be offered to ensure27

satisfaction of the obligation is not commercially reasonable, except in cases covered by the28

preceding sentence.29

50

(b) Before any sale pursuant to this section, any person claiming a right in the goods may1

pay the amount necessary to satisfy the lien and the reasonable expenses incurred in complying2

with this section. In that event, the goods may not be sold but must be retained by the carrier,3

subject to the terms of the bill of lading and this article.4

(c) A carrier may buy at any public sale pursuant to this section.5

(d) A purchaser in good faith of goods sold to enforce a carrier's lien takes the goods free6

of any rights of persons against which the lien was valid, despite the carrier’s noncompliance7

with this section.8

(e) A carrier may satisfy its lien from the proceeds of any sale pursuant to this section but9

shall hold the balance, if any, for delivery on demand to any person to which the carrier would10

have been bound to deliver the goods.11

(f) The rights provided by this section are in addition to all other rights allowed by law to12

a creditor against a debtor.13

(g) A carrier's lien may be enforced pursuant to either subsection (a) or the procedure set14

forth in Section 7-210(b).15

(h) A carrier is liable for damages caused by failure to comply with the requirements for16

sale under this section and, in case of willful violation, is liable for conversion.17



Changes: To conform language to modern usage and for style.2223

Purposes:2425

This section is intended to give the carrier an enforcement procedure of its lien coextensive26

51

with that given the warehouse in cases other than those covering noncommercial storage by the1warehouse. See Section 7-210 and comments.2


5Definitional Cross References:6"Bill of lading". Section 1-201.7“Carrier”. Section 7-102.8"Creditor". Section 1-201.9"Delivery". Section 1-201.10"Good faith". Section 1-201. [7-102]11"Goods". Section 7-102.12"Notification". Section 1-202.13"Notifies". Section 1-202.14"Person". Section 1-201.15"Purchaser". Section 1-201.16"Rights". Section 1-201.17"Term". Section 1-201.18

1920

SECTION 7-309. DUTY OF CARE; CONTRACTUAL LIMITATION OF21

CARRIER'S LIABILITY.22

(a) A carrier that issues a bill of lading, whether negotiable or nonnegotiable, shall23

exercise the degree of care in relation to the goods which a reasonably careful person would24

exercise under similar circumstances. This subsection does not affect any statute, regulation, or25

rule of law that imposes liability upon a common carrier for damages not caused by its26

negligence.27

(b) Damages may be limited by a term in the bill of lading or in a transportation28

agreement that the carrier's liability may not exceed a value stated in the bill or transportation29

agreement if the carrier's rates are dependent upon value and the consignor is afforded an30

opportunity to declare a higher value and the consignor is advised of the opportunity. However,31

such a limitation is not effective with respect to the carrier's liability for conversion to its own32

52

use.1

(c) Reasonable provisions as to the time and manner of presenting claims and2

commencing actions based on the shipment may be included in a bill of lading or a transportation3

agreement.4



Changes: References to tariffs eliminated because of deregulation, adding reference to8transportation agreements, and for style.9

10Purposes:11

121. A bill of lading may also serve as the contract between the carrier and the bailor. Parties13

in their contract should be able to limit the amount of damages for breach of that contract14including breach of the duty to take reasonable care of the goods. The parties cannot disclaim by15contract the carrier’s obligation of care. Section 1-302.16

Federal statutes and treaties for air, maritime and rail transport may alter the standard of care. 17These federal statutes and treaties preempt this section when applicable. Section 7-103. 18Subsection (a) does not impair any rule of law imposing the liability of an insurer on a common19carrier in intrastate commerce. Subsection (b), however, applies to the common carrier’s 20liability as an insurer as well as to liability based on negligence. Subsection (b) allows the term21limiting damages to appear either in the bill of lading or in the parties’ transportation agreement. 22Compare 7-204(b). Subsection (c) allows the parties to agree to provisions regarding time and23manner of presenting claims or commencing actions if the provisions are either in the bill of24lading or the transportation agreement. Compare 7-204(c). Transportation agreements are25commonly used to establish agreed terms between carriers and shippers that have an on-going26relationship.27

2. References to public tariffs in former Section 7-309(2) and (3) have been deleted in light28of the modern era of deregulation. See Comment 2 to Section 7-103. If a tariff is required under29state or federal law, pursuant to Section 7-103(a), the tariff would control over the rule of this30section. As governed by contract law, parties may incorporate by reference the limits on the31amount of damages or the reasonable provisions as to the time and manner of presenting claims32set forth in applicable tariffs, e.g. a maximum unit value beyond which goods are not taken or a33disclaimer of responsibility for undeclared articles of extraordinary value.34

3. As under former Section 7-309(2), subsection (b) provides that a limitation of damages is35ineffective if the carrier has converted the goods to its own use. A mere failure to redeliver the36goods is not conversion to the carrier’s own use. Conversion to its own use has a specialized37meaning in the case law that is narrower than the idea of conversion generally.38

53

4. As used in this section, damages may include damages arising from delay in delivery. 1Delivery dates and times are often specified in the parties’ contract. See Section 7-403.2

3Cross Reference: Sections 1-302, 7-103, 7-204, 7-403.4

5Definitional Cross References:6"Action". Section 1-201.7"Bill of lading". Section 1-201.8“Carrier”. Section 7-102.9"Consignor". Section 7-102.10“Document of Title”. Section 1-102.11"Goods". Section 7-102.12"Value". Section 1-204.13

1415

54

PART 41

WAREHOUSE RECEIPTS AND BILLS OF LADING: GENERAL OBLIGATIONS2

3

SECTION 7-401. IRREGULARITIES IN ISSUE OF RECEIPT OR BILL OR4

CONDUCT OF ISSUER. The obligations imposed by this article on an issuer apply to a5

document of title even if:6

(1) the document does not comply with the requirements of this article or of any other7

statute, rule, or regulation regarding its issue, form, or content; 8

(2) the issuer violated laws regulating the conduct of its business; 9

(3) the goods covered by the document were owned by the bailee when the document was10

issued; or11

(4) the person issuing the document is not a warehouse but the document purports to be a12

warehouse receipt.13




Purposes:2021

The bailee's liability on its document despite non-receipt or misdescription of the goods is22affirmed in Sections 7-203 and 7-301. The purpose of this section is to make it clear that23regardless of irregularities a document which falls within the definition of document of title24imposes on the issuer the obligations stated in this Article. For example, a bailee will not be25permitted to avoid its obligation to deliver the goods (Section 7-403) or its obligation of due care26with respect to them (Sections 7-204 and 7-309) by taking the position that no valid "document"27was issued because it failed to file a statutory bond or did not pay stamp taxes or did not disclose28the place of storage in the document. Sanctions against violations of statutory or administrative29duties with respect to documents should be limited to revocation of license or other measures30

55

prescribed by the regulation imposing the duty. See Section 7-103.12

Cross References: Sections 7-103, 7-203, 7-204, 7-301, 7-309.34

Definitional Cross References:5"Bailee". Section 7-102.6"Document of title". Section 1-201.7"Goods". Section 7-102.8"Issuer". Section 7-102.9"Person". Section 1-201.10"Warehouse receipt". Section 1-201.11"Warehouse". Section 7-102.12

1314

SECTION 7-402. DUPLICATE DOCUMENT OF TITLE; OVERISSUE. A duplicate15

or any other document of title purporting to cover goods already represented by an outstanding16

document of the same issuer does not confer any right in the goods, except as provided in the17

case of tangible bills of lading in a set of parts, overissue of documents for fungible goods,18

substitutes for lost, stolen, or destroyed documents, or substitute documents issued pursuant to19

Section 7-105. The issuer is liable for damages caused by its overissue or failure to identify a20

duplicate document by a conspicuous notation.21



Changes: Changes to accommodate electronic documents.2627

Purposes:2829

1. This section treats a duplicate which is not properly identified as a duplicate like any other30overissue of documents: a purchaser of such a document acquires no title but only a cause of31action for damages against the person that made the deception possible, except in the cases noted32in the section. But parts of a tangible bill lawfully issued in a set of parts are not "overissue"33(Section 7-304). Of course, if the issuer has clearly indicated that a document is a duplicate so34that no one can be deceived by it, and in fact the duplicate is a correct copy of the original, the35issuer is not liable for preparing and delivering such a duplicate copy.36

56

Section 7-105 allows documents of title to be reissued in another medium. Re-issuance of a1document in an alternative medium under Section 7-105 requires that the original document be2surrendered to the issuer in order to make the substitute document the effective document. If the3substitute document is not issued in compliance with section 7-105, then the document should be4treated as a duplicate under this section.5

2. The section applies to nonnegotiable documents to the extent of providing an action for6damages for one who acquires an unmarked duplicate from a transferor who knew the facts and7would therefore have had no cause of action against the issuer of the duplicate. Ordinarily the8transferee of a nonnegotiable document acquires only the rights of its transferor.9

3. Overissue is defined so as to exclude the common situation where two valid documents of10different issuers are outstanding for the same goods at the same time. Thus freight forwarders11commonly issue bills of lading to their customers for small shipments to be combined into12carload shipments for which the railroad will issue a bill of lading to the forwarder. So also a13warehouse receipt may be outstanding against goods, and the holder of the receipt may issue14delivery orders against the same goods. In these cases dealings with the subsequently issued15documents may be effective to transfer title; e.g. negotiation of a delivery order will effectively16transfer title in the ordinary case where no dishonesty has occurred and the goods are available to17satisfy the orders. Section 7-503 provides for cases of conflict between documents of different18issuers.19

20Cross References:21Point 1: Sections 7-105, 7-207, 7-304, and 7-601.22Point 3: Section 7-503.23

24Definitional Cross References:25"Bill of lading". Section 1-201.26"Conspicuous". Section 1-201.27"Document of title". Section 1-201.28"Fungible goods." Section 1-201.29"Goods". Section 7-102.30"Issuer". Section 7-102.31"Right". Section 1-201.32

3334

SECTION 7-403. OBLIGATION OF WAREHOUSE OR CARRIER TO DELIVER; 35

EXCUSE.36

(a) A bailee shall deliver the goods to a person entitled under a document of title if the37

person complies with subsections (b) and (c), unless and to the extent that the bailee establishes38

any of the following:39

57

(1) delivery of the goods to a person whose receipt was rightful as against the1

claimant;2

(2) damage to or delay, loss, or destruction of the goods for which the bailee is not3

liable;4

(3) previous sale or other disposition of the goods in lawful enforcement of a lien or5

on a warehouse's lawful termination of storage;6

(4) the exercise by a seller of its right to stop delivery pursuant to Section 2-705 or by7

a lessor of its right to stop delivery pursuant to Section 2A-526;8

(5) a diversion, reconsignment, or other disposition pursuant to Section 7-303;9

(6) release, satisfaction, or any other fact affording a personal defense against the10

claimant; or11

(7) any other lawful excuse.12

(b) A person claiming goods covered by a document of title shall satisfy the bailee's lien 13

if the bailee so requests or the bailee is prohibited by law from delivering the goods until the14

charges are paid. 15

(c) Unless a person claiming the goods is one against which the document of title does16

not confer a right under Section 7-503(a):17

(1) the person claiming under a document shall surrender possession or control of any18

outstanding negotiable document covering the goods for cancellation or indication of partial19

deliveries; and20

(2) the bailee shall cancel the document or conspicuously indicate in the document the21

partial delivery or be liable to any person to which the document is duly negotiated.22

58



Changes: Definition in former Section 7-403(4) moved to Section 7-102; bracketed language in5former Section 7-403(1)(b) deleted; added cross reference to Section 2A-526; changes for style.6

7Purposes:8

91. The present section, following former Section 7-403, is constructed on the basis of stating10

what previous deliveries or other circumstances operate to excuse the bailee's normal obligation11on the document. Accordingly, "justified" deliveries under the pre-Code uniform acts now find12their place as "excuse" under subsection (a).13

2. The principal case covered by subsection (a)(1) is delivery to a person whose title is14paramount to the rights represented by the document. For example, if a thief deposits stolen15goods in a warehouse facility and takes a negotiable receipt, the warehouse is not liable on the16receipt if it has surrendered the goods to the true owner, even though the receipt is held by a good17faith purchaser. See Section 7-503(a). However, if the owner entrusted the goods to a person18with power of disposition, and that person deposited the goods and took a negotiable document,19the owner receiving delivery would not be rightful as against a holder to whom the negotiable20document was duly negotiated, and delivery to the owner would not give the bailee a defense21against such a holder. See Sections 7-502(a)(2), 7-503(a)(1).22

3. Subsection (a)(2) amounts to a cross reference to all the tort law that determines the23varying responsibilities and standards of care applicable to commercial bailees. A restatement of24this tort law would be beyond the scope of this Act. Much of the applicable law as to25responsibility of bailees for the preservation of the goods and limitation of liability in case of loss26has been codified for particular classes of bailees in interstate and foreign commerce by federal27legislation and treaty and for intrastate carriers and other bailees by the regulatory state laws28preserved by Section 7-103. In the absence of governing legislation the common law will prevail29subject to the minimum standard of reasonable care prescribed by Sections 7-204 and 7-309 of30this Article.31

The bracketed language found in former Section 7-403(1)(b) has been deleted thereby leaving32the allocations of the burden of going forward with the evidence and the burden of proof to the33procedural law of the various states.34

Subsection (a)(4) contains a cross reference to both the seller’s and the lessor’s rights to stop35delivery under Article 2 and Article 2A respectively.36

4. As under former Section 7-403, there is no requirement that a request for delivery must be37accompanied by a formal tender of the amount of the charges due. Rather, the bailee must38request payment of the amount of its lien when asked to deliver, and only in case this request is39refused is it justified in declining to deliver because of nonpayment of charges. Where delivery40without payment is forbidden by law, the request is treated as implicit. Such a prohibition41reflects a policy of uniformity to prevent discrimination by failure to request payment in42particular cases. Subsection (b) must be read in conjunction with the priorities given to the43

59

warehouse lien and the carrier lien under Section 7-209 and 7-307, respectively. If the parties are1in dispute about whether the request for payment of the lien is legally proper, the bailee may have2recourse to interpleader. See Section 7-603.3

5. Subsection (c) states the obvious duty of a bailee to take up a negotiable document or note4partial deliveries conspicuously thereon, and the result of failure in that duty. It is subject to only5one exception, that stated in subsection (a)(1) of this section and in Section 7-503(a). Subsection6(c) is limited to cases of delivery to a claimant; it has no application, for example, where goods7held under a negotiable document are lawfully sold to enforce the bailee's lien.8

6. When courts are considering subsection (a)(7), “any other lawful excuse,” among others,9refers to compliance with court orders under Sections 7-601, 7-602 and 7-603. 10

11Cross References:12Point 2: Sections 7-502 and 7-503.13Point 3: Sections 2-705, 2A-526, 7-103, 7-204, and 7-309 and 10-103.14Point 4: Sections 7-209, 7-307 and 7-603.15Point 5: Section 7-503(1).16Point 6: Sections 7-601, 7-602, and 7-603.17

18Definitional Cross References:19"Bailee". Section 7-102.20"Conspicuous". Section 1-201.21"Delivery". Section 1-201.22"Document of title". Section 1-201.23"Duly negotiate". Section 7-501.24"Goods". Section 7-102.25“Lessor”. Section 2A-103.26"Person". Section 1-201.27"Receipt of goods". Section 2-103.28"Right". Section 1-201.29"Terms". Section 1-201.30"Warehouse". Section 7-102.31

3233

SECTION 7-404. NO LIABILITY FOR GOOD FAITH DELIVERY PURSUANT TO34

DOCUMENT OF TITLE. A bailee that in good faith has received goods and delivered or35

otherwise disposed of the goods according to the terms of a document of title or pursuant to this36

article is not liable for the goods even if:37

(1) the person from which the bailee received the goods did not have authority to procure38

60

the document or to dispose of the goods; or1

(2) the person to which the bailee delivered the goods did not have authority to receive2

the goods.34



Changes: Changes reflect the definition of good faith in Section 1-201 [7-102] and for style .910

Purposes:11This section uses the test of good faith, as defined in Section 1-201 [7-102], to continue the12

policy of former Section 7-404. Good faith now means “honesty in fact and the observance of13reasonable commercial standards of fair dealing.” The section states explicitly that the common14law rule of "innocent conversion" by unauthorized "intermeddling" with another's property is15inapplicable to the operations of commercial carriers and warehousemen that in good faith16perform obligations that they have assumed and that generally they are under a legal compulsion17to assume. The section applies to delivery to a fraudulent holder of a valid document as well as18to delivery to the holder of an invalid document. Of course, in appropriate circumstances, a19bailee may use interpleader or other dispute resolution process. See Section 7-603.20


23Definitional Cross References:24"Bailee". Section 7-102.25"Delivery". Section 1-201.26"Document of title". Section 1-201.27"Good faith". Section 1-201 [7-102].28"Goods". Section 7-102.29"Person". Section 1-201.30"Receipt of goods". Section 2-103.31"Term". Section 1-201.32

33

61

1PART 52

WAREHOUSE RECEIPTS AND BILLS OF LADING: NEGOTIATION AND3

TRANSFER4

5

SECTION 7-501. FORM OF NEGOTIATION AND REQUIREMENTS OF DUE6

NEGOTIATION.7

(a) The following rules apply to a negotiable tangible document of title:8

(1) If the document’s original terms run to the order of a named person, the document9

is negotiated by the named person’s indorsement and delivery. After the named person’s10

indorsement in blank or to bearer, any person may negotiate the document by delivery alone.11

(2) If the document’s original terms run to bearer, it is negotiated by delivery alone.12

(3) If the document’s original terms run to the order of a named person and it is13

delivered to the named person, the effect is the same as if the document had been negotiated.14

(4) Negotiation of the document after it has been indorsed to a named person requires15

indorsement by the named person as well as delivery.16

(5) A document is duly negotiated if it is negotiated in the manner stated in this17

subsection to a holder that purchases it in good faith, without notice of any defense against or18

claim to it on the part of any person, and for value, unless it is established that the negotiation is19

not in the regular course of business or financing or involves receiving the document in20

settlement or payment of a monetary obligation.21

(b) The following rules apply to a negotiable electronic document of title:22

62

(1) If the document’s original terms run to the order of a named person or to bearer,1

the document is negotiated by delivery of the document to another person. Indorsement by the2

named person is not required to negotiate the document.3

(2) If the document’s original terms run to the order of a named person and the named4

person has control of the document, the effect is the same as if the document had been5

negotiated.6

(3) A document is duly negotiated if it is negotiated in the manner stated in this7

subsection to a holder that purchases it in good faith, without notice of any defense against or8

claim to it on the part of any person, and for value, unless it is established that the negotiation is9

not in the regular course of business or financing or involves taking delivery of the document in10

settlement or payment of a monetary obligation.11

(c) Indorsement of a nonnegotiable document of title neither makes it negotiable nor adds12

to the transferee's rights.13

(d) The naming in a negotiable bill of lading of a person to be notified of the arrival of the14

goods does not limit the negotiability of the bill or constitute notice to a purchaser of the bill of15

any interest of that person in the goods.16



Changes: To accommodate negotiable electronic documents of title.2122

Purpose:2324

1. Subsection (a) has been limited to tangible negotiable documents of title but otherwise25remains unchanged in substance from the rules in former Section 7-501. Subsection (b) is new26and applies to negotiable electronic documents of title. Delivery of a negotiable electronic27

63

document is through voluntary transfer of control. Section 1-201 definition of “delivery.” The1control concept as applied to negotiable electronic documents of title is the substitute for both2possession and indorsement as applied to negotiable tangible documents of title. Section 7-106. 3

As under former Section 7-501, in order to effect a “due negotiation” the negotiation must be4in the "regular course of business or financing" in order to transfer greater rights than those held5by the person negotiating. The foundation of the mercantile doctrine of good faith purchase for6value has always been, as shown by the case situations, the furtherance and protection of the7regular course of trade. The reason for allowing a person, in bad faith or in error, to convey away8rights which are not its own has from the beginning been to make possible the speedy handling of9that great run of commercial transactions which are patently usual and normal. 10

There are two aspects to the usual and normal course of mercantile dealings, namely, the11person making the transfer and the nature of the transaction itself. The first question which arises12is: Is the transferor a person with whom it is reasonable to deal as having full powers? In regard13to documents of title the only holder whose possession or control appears, commercially, to be in14order is almost invariably a person in the trade. No commercial purpose is served by allowing a15tramp or a professor to "duly negotiate" an order bill of lading for hides or cotton not their own,16and since such a transfer is obviously not in the regular course of business, it is excluded from17the scope of the protection of subsections (a)(5) or (b)(3).18

The second question posed by the "regular course" qualification is: Is the transaction one19which is normally proper to pass full rights without inquiry, even though the transferor itself may20not have such rights to pass, and even though the transferor may be acting in breach of duty? In21raising this question the "regular course" criterion has the further advantage of limiting, the22effective wrongful disposition to transactions whose protection will really further trade. 23Obviously, the snapping up of goods for quick resale at a price suspiciously below the market24deserves no protection as a matter of policy: it is also clearly outside the range of regular course.25

Any notice on the document sufficient to put a merchant on inquiry as to the "regular course"26quality of the transaction will frustrate a "due negotiation". Thus irregularity of the document or27unexplained staleness of a bill of lading may appropriately be recognized as negating a28negotiation in "regular" course.29

A pre-existing claim constitutes value, and "due negotiation" does not require "new value." 30A usual and ordinary transaction in which documents are received as security for credit31previously extended may be in "regular" course, even though there is a demand for additional32collateral because the creditor "deems himself insecure." But the matter has moved out of the33regular course of financing if the debtor is thought to be insolvent, the credit previously extended34is in effect cancelled, and the creditor snatches a plank in the shipwreck under the guise of a35demand for additional collateral. Where a money debt is "paid" in commodity paper, any36question of "regular" course disappears, as the case is explicitly excepted from "due negotiation".37

2. Negotiation under this section may be made by any holder no matter how the holder38acquired possession or control of the document.39

3. Subsections (a)(3) and (b)(2) make explicit a matter upon which the intent of the pre-Code40law was clear but the language somewhat obscure: a negotiation results from a delivery to a41banker or buyer to whose order the document has been taken by the person making the bailment. 42There is no presumption of irregularity in such a negotiation; it may very well be in "regular43

64

course."14. This Article does not contain any provision creating a presumption of due negotiation to,2

and full rights in, a holder of a document of title akin to that created by Uniform Commercial3Code Article 3. But the reason of the provisions of this Act (Section 1-307) on the prima facie4authenticity and accuracy of third party documents, joins with the reason of the present section to5work such a presumption in favor of any person who has power to make a due negotiation. It6would not make sense for this Act to authorize a purchaser to indulge the presumption of7regularity if the courts were not also called upon to do so.8

5. Subsections (c) and (d) are unchanged from prior law and apply to both tangible and9electronic documents of title.10

11Cross References: Sections 1-307, 7-502 and 7-503.12

13Definitional Cross References:14"Bearer". Section 1-201.15“Control”. Section 7-106.16"Delivery". Section 1-201.17"Document of title". Section 1-201.18"Good faith". Section 1-201 [7-102].19"Holder". Section 1-201.20"Notice". Section 1-202.21"Person". Section 1-201.22"Purchase". Section 1-201.23"Rights". Section 1-201.24"Term". Section 1-201.25"Value". Section 1-204.26

2728

SECTION 7-502. RIGHTS ACQUIRED BY DUE NEGOTIATION.29

(a) Subject to Sections 7-205 and 7-503, a holder to which a negotiable document of title30

has been duly negotiated acquires thereby:31

(1) title to the document;32

(2) title to the goods;33

(3) all rights accruing under the law of agency or estoppel, including rights to goods34

delivered to the bailee after the document was issued; and35

(4) the direct obligation of the issuer to hold or deliver the goods according to the36

65

terms of the document free of any defense or claim by the issuer except those arising under the1

terms of the document or under this article. In the case of a delivery order, the bailee's obligation2

accrues only upon the bailee’s acceptance of the delivery order and the obligation acquired by the3

holder is that the issuer and any indorser will procure the acceptance of the bailee.4

(b) Subject to Section 7-503, title and rights acquired by due negotiation are not defeated5

by any stoppage of the goods represented by the document of title or by surrender of the goods by6

the bailee and are not impaired even if:7

(1) the due negotiation or any prior due negotiation constituted a breach of duty; 8

(2) any person has been deprived of possession of a negotiable tangible document or9

control of a negotiable electronic document by misrepresentation, fraud, accident, mistake,10

duress, loss, theft, or conversion; or11

(3) a previous sale or other transfer of the goods or document has been made to a third12

person.13

Proposed Comment1415


Changes: To accommodate electronic documents of title and for style.1819

Purpose:2021

1. This section applies to both tangible and electronic documents of title. Due negotiation is22defined in Section 7-501. The several necessary qualifications of the broad principle that the23holder of a document acquired in a due negotiation is the owner of the document and the goods24have been brought together in the next section.25

2. Subsection (a)(3) covers the case of "feeding" of a duly negotiated document by26subsequent delivery to the bailee of such goods as the document falsely purported to cover; the27bailee in such case is estopped as against the holder of the document.28

3. The explicit statement in subsection (a)(4) of the bailee's direct obligation to the holder29precludes the defense that the document in question was "spent" after the carrier had delivered30

66

the goods to a previous holder. But the holder is subject to such defenses as non-negligent1destruction even though not apparent on the document. The sentence on delivery orders applies2only to delivery orders in negotiable form which have been duly negotiated. On delivery orders,3see also Section 7-503(b) and Comment.4

4. Subsection (b) continues the law which gave full effect to the issuance or due negotiation5of a negotiable document. The subsection adds nothing to the effect of the rules stated in6subsection (a), but it has been included since such explicit reference was provided under former7Section 7-502 to preserve the right of a purchaser by due negotiation. The listing is not8exhaustive. The language"any stoppage" is included lest an inference be drawn that a stoppage9of the goods before or after transit might cut off or otherwise impair the purchaser's rights.10

11Cross References: Sections 7-103, 7-205, 7-403, 7-501, and 7-503.12

13Definitional Cross References:14"Bailee". Section 7-102.15“Control”. Section 7-106.16"Delivery". Section 1-201.17"Delivery order". Section 7-102.18"Document of title". Section 1-201.19"Duly negotiate". Section 7-501.20"Fungible". Section 1-201.21"Goods". Section 7-102.22"Holder". Section 1-201.23"Issuer". Section 7-102.24"Person". Section 1-201.25"Rights". Section 1-201.26"Term". Section 1-201.27"Warehouse receipt". Section 1-201.28

2930

SECTION 7-503. DOCUMENT OF TITLE TO GOODS DEFEATED IN CERTAIN31

CASES.32

(a) A document of title confers no right in goods against a person that before issuance of33

the document had a legal interest or a perfected security interest in the goods and that did not:34

(1) deliver or entrust the goods or any document covering the goods to the bailor or35

the bailor’s nominee with actual or apparent authority to ship, store, or sell; with power to obtain36

delivery under Section 7-403; or with power of disposition under Section 2-403, 2A-304(2), 2A-37

67

305(2), or 9-320 or other statute or rule of law; or1

(2) acquiesce in the procurement by the bailor or its nominee of any document.2

(b) Title to goods based upon an unaccepted delivery order is subject to the rights of any3

person to which a negotiable warehouse receipt or bill of lading covering the goods has been duly4

negotiated. That title may be defeated under Section 7-504 to the same extent as the rights of the5

issuer or a transferee from the issuer.6

(c) Title to goods based upon a bill of lading issued to a freight forwarder is subject to the7

rights of any person to which a bill issued by the freight forwarder is duly negotiated. However,8

delivery by the carrier in accordance with Part 4 pursuant to its own bill of lading discharges the9

carrier's obligation to deliver.10



Changes: Changes to cross-reference to Article 2A and for style. 1516

Purposes:1718

1. In general it may be said that the title of a purchaser by due negotiation prevails over19almost any interest in the goods which existed prior to the procurement of the document of title if20the possession of the goods by the person obtaining the document derived from any action by the21prior claimant which introduced the goods into the stream of commerce or carried them along22that stream. A thief of the goods cannot indeed by shipping or storing them to the thief’s own23order acquire power to transfer them to a good faith purchaser. Nor can a tenant or mortgagor24defeat any rights of a landlord or mortgagee which have been perfected under the local law25merely by wrongfully shipping or storing a portion of the crop or other goods. However,26"acquiescence" by the landlord or mortgagee does not require active consent under subsection27(a)(2) and knowledge of the likelihood of storage or shipment with no objection or effort to28control it is sufficient to defeat the landlord’s or the mortgagee’s rights as against one who takes29by due negotiation of a negotiable document.30

On the other hand, where goods are delivered to a factor for sale, even though the factor has31made no advances and is limited in its duty to sell for cash, the goods are "entrusted" to the factor32"with actual . . . authority . . . to sell" under subsection (a)(1), and if the factor procures a33

68

negotiable document of title it can transfer the owner's interest to a purchaser by due negotiation. 1Further, where the factor is in the business of selling, goods entrusted to it simply for safekeeping2or storage may be entrusted under circumstances which give the factor "apparent authority to3ship, store or sell" under subsection (a)(1), or power of disposition under Section 2-403, 2A-4304(2), 2A-305(2), 7-205, or 9-320, or under a statute such as the earlier Factors Acts, or under a5rule of law giving effect to apparent ownership. See Section 1-103.6

Persons having an interest in goods also frequently deliver or entrust them to agents or7servants other than factors for the purpose of shipping or warehousing or under circumstances8reasonably contemplating such action. This Act is clear that such persons assume full risk that9the agent to whom the goods are so delivered may ship or store in breach of duty, take a10document to the agent’s own order and then proceed to misappropriate the negotiable document11of title that embodies the goods. This Act makes no distinction between possession or mere12custody in such situations and finds no exception in the case of larceny by a bailee or the like. 13The safeguard in such situations lies in the requirement that a due negotiation can occur only "in14the regular course of business or financing" and that the purchase be in good faith and without15notice. See Section 7-501. Documents of title have no market among the commercially16inexperienced and the commercially experienced do not take them without inquiry from persons17known to be truck drivers or petty clerks even though such persons purport to be operating in18their own names.19

Again, where the seller allows a buyer to receive goods under a contract for sale, though as a20"conditional delivery" or under "cash sale" terms and on explicit agreement for immediate21payment, the buyer thereby acquires power to defeat the seller's interest by transfer of the goods22to certain good faith purchasers. See Section 2-403. Both in policy and under the language of23subsection (a)(1) that same power must be extended to accomplish the same result if the buyer24procures a negotiable document of title to the goods and duly negotiates it.25

2. Under subsection (a) a delivery order issued by a person having no right in or power over26the goods is ineffective unless the owner acts as provided in subsection (a)(1) or (2). Thus the27rights of a transferee of a non-negotiable warehouse receipt can be defeated by a delivery order28subsequently issued by the transferor only if the transferee "delivers or entrusts" to the "person29procuring" the delivery order or "acquiesces" in that person’s procurement. Similarly, a second30delivery order issued by the same issuer for the same goods will ordinarily be subject to the first,31both under this section and under Section 7-402. After a delivery order is validly issued but32before it is accepted, it may nevertheless be defeated under subsection (b) in much the same way33that the rights of a transferee may be defeated under Section 7-504. For example, a buyer in34ordinary course from the issuer may defeat the rights of the holder of a prior delivery order if the35bailee receives notification of the buyer's rights before notification of the holder's rights. Section367-504(b)(2). But an accepted delivery order has the same effect as a document issued by the37bailee.38

3. Under subsection (c) a bill of lading issued to a freight forwarder is subordinated to the39freight forwarder's document of title, since the bill on its face gives notice of the fact that a40freight forwarder is in the picture and the freight forwarder has in all probability issued a41document of title. But the carrier is protected in following the terms of its own bill of lading.42

43

69

Cross References:1Point 1: Sections 1-103, 2-403, 2A-304(2), 2A-305(2), 7-205, 7-501, 9-320, and 9-331.2Point 2: Sections 7-402 and 7-504.3Point 3: Sections 7-402, 7-403 and 7-404.4

5Definitional Cross References:6"Bill of lading". Section 1-201.7"Contract for sale". Section 2-106.8"Delivery". Section 1-201.9"Delivery order". Section 7-102.10"Document of title". Section 1-201.11"Duly negotiate". Section 7-501.12"Goods". Section 7-102.13"Person". Section 1-201.14"Right". Section 1-201.15"Warehouse receipt". Section 1-201.16

1718

SECTION 7-504. RIGHTS ACQUIRED IN ABSENCE OF DUE NEGOTIATION; 19

EFFECT OF DIVERSION; STOPPAGE OF DELIVERY.20

(a) A transferee of a document of title, whether negotiable or nonnegotiable, to which the21

document has been delivered but not duly negotiated, acquires the title and rights that its22

transferor had or had actual authority to convey.23

(b) In the case of a nonnegotiable document of title, until but not after the bailee receives24

notice of the transfer, the rights of the transferee may be defeated:25

(1) by those creditors of the transferor that could treat the transfer as void under26

Section 2-402 or 2A-308 ; 27

(2) by a buyer from the transferor in ordinary course of business if the bailee has28

delivered the goods to the buyer or received notification of the buyer’s rights; 29

(3) by a lessee from the transferor in ordinary course of business if the bailee has30

delivered the goods to the lessee or received notification of the lessee’s rights; or31

70

(4) as against the bailee, by good faith dealings of the bailee with the transferor.1

(c) A diversion or other change of shipping instructions by the consignor in a2

nonnegotiable bill of lading which causes the bailee not to deliver the goods to the consignee3

defeats the consignee's title to the goods if the goods have been delivered to a buyer in ordinary4

course of business or a lessee in ordinary course of business and in any event defeats the5

consignee's rights against the bailee.6

(d) Delivery of the goods pursuant to a nonnegotiable document of title may be stopped7

by a seller under Section 2-705 or a lessor under Section 2A-526, subject to the requirements of8

due notification in those sections. A bailee honoring the seller's or lessor’s instructions is9

entitled to be indemnified by the seller or lessor against any resulting loss or expense.10



Changes: To include cross-references to Article 2A and for style.1516

Purposes:171. Under the general principles controlling negotiable documents, it is clear that in the18

absence of due negotiation a transferor cannot convey greater rights than the transferor has, even19when the negotiation is formally perfect. This section recognizes the transferor's power to20transfer rights which the transferor has or has "actual authority to convey." Thus, where a21negotiable document of title is being transferred the operation of the principle of estoppel is not22recognized, as contrasted with situations involving the transfer of the goods themselves. 23(Compare Section 2-403 on good faith purchase of goods.) This section applies to both tangible24and electronic documents of title.25

A necessary part of the price for the protection of regular dealings with negotiable documents26of title is an insistence that no dealing which is in any way irregular shall be recognized as a good27faith purchase of the document or of any rights pertaining to it. So, where the transfer of a28negotiable document fails as a negotiation because a requisite indorsement is forged or otherwise29missing, the purchaser in good faith and for value may be in the anomalous position of having30less rights, in part, than if the purchaser had purchased the goods themselves. True, the31purchaser’s rights are not subject to defeat by attachment of the goods or surrender of them to the32purchaser’s transferor (contrast subsection (b)); but on the other hand, the purchaser cannot33

71

acquire enforceable rights to control or receive the goods over the bailee's objection merely by1giving notice to the bailee. Similarly, a consignee who makes payment to its consignor against a2straight bill of lading can thereby acquire the position of a good faith purchaser of goods under3provisions of the Article of this Act on Sales (Section 2-403), whereas the same payment made in4good faith against an unendorsed order bill would not have such effect. The appropriate remedy5of a purchaser in such a situation is to regularize its status by compelling indorsement of the6document (see Section 7-506).7

2. As in the case of transfer--as opposed to "due negotiation"--of negotiable documents,8subsection (a) empowers the transferor of a nonnegotiable document to transfer only such rights9as the transferor has or has "actual authority" to convey. In contrast to situations involving the10goods themselves the operation of estoppel or agency principles is not here recognized to enable11the transferor to convey greater rights than the transferor actually has. Subsection (b) makes it12clear, however, that the transferee of a nonnegotiable document may acquire rights greater in13some respects than those of his transferor by giving notice of the transfer to the bailee. New14subsection (b)(3) provides for the rights of a lessee in the ordinary course.15

3. Subsection (c) is in part a reiteration of the carrier's immunity from liability if it honors16instructions of the consignor to divert, but there is added a provision protecting the title of the17substituted consignee if the latter is a buyer in ordinary course of business. A typical situation18would be where a manufacturer, having shipped a lot of standardized goods to A on19nonnegotiable bill of lading, diverts the goods to customer B who pays for them. Under pre-20Code passage-of-title-by-appropriation doctrine A might reclaim the goods from B. However, no21consideration of commercial policy supports this involvement of an innocent third party in the22default of the manufacturer on his contract to A; and the common commercial practice of23diverting goods in transit suggests a trade understanding in accordance with this subsection. The24same result should obtain if the substituted consignee is a lessee in ordinary course. The extent25of the lessee’s interest in the goods is less than a buyer’s interest in the goods. However, as26against the first consignee and the lessee in ordinary course as the substituted consignee, the27lessee’s rights in the goods as granted under the lease are superior to the first consignee’s rights.28

4. Subsection (d) gives the carrier an express right to indemnity where the carrier honors a29seller's request to stop delivery.30

5. Section 1-202 gives the bailee protection, if due diligence is exercised where the bailee's31organization has not had time to act on a notification.32

33Cross References:34

35Point 1: Sections 2-403 and 7-506.36Point 2: Sections 2-403 and 2A-304.37Point 3: Sections 7-303, 7-403(a)(5) and 7-404.38Point 4: Sections 2-705 and 7-403(a)(4).39Point 5: Section 1-202.40

41Definitional Cross References:42"Bailee". Section 7-102.43

72

"Bill of lading". Section 1-201.1"Buyer in ordinary course of business". Section 1-201.2"Consignee". Section 7-102.3"Consignor". Section 7-102.4"Creditor". Section 1-201.5"Delivery". Section 1-201.6“Document of Title”. Section 1-201.7"Duly negotiate". Section 7-501.8"Good faith". Section 1-201. [7-102].9"Goods". Section 7-102.10"Honor". Section 1-201.11“Lessee in ordinary course”. Section 2A-103.12"Notification" Section 1-202.13"Purchaser". Section 1-201.14"Rights". Section 1-201.15

1617

SECTION 7-505. INDORSER NOT GUARANTOR FOR OTHER PARTIES. The18

indorsement of a tangible document of title issued by a bailee does not make the indorser liable19

for any default by the bailee or previous indorsers.20



Changes: Limited to tangible documents of title.2526

Purposes:2728

This section is limited to tangible documents of title as the concept of indorsement is29irrelevant to electronic documents of title. Electronic documents of title will be transferred by30delivery of control. Section 7-106. The indorsement of a tangible document of title is generally31understood to be directed towards perfecting the transferee's rights rather than towards assuming32additional obligations. The language of the present section, however, does not preclude the one33case in which an indorsement given for value guarantees future action, namely, that in which the34bailee has not yet become liable upon the document at the time of the indorsement. Under such35circumstances the indorser, of course, engages that appropriate honor of the document by the36bailee will occur. See Section 7-502(a)(4) as to negotiable delivery orders. However, even in37such a case, once the bailee attorns to the transferee, the indorser's obligation has been fulfilled38and the policy of this section excludes any continuing obligation on the part of the indorser for39the bailee's ultimate actual performance.40

73

Cross Reference: Sections 7-106 and 7-502.12

Definitional Cross References:3"Bailee". Section 7-102.4"Document of title". Section 1-201.5"Party". Section 1-201.6

78

SECTION 7-506. DELIVERY WITHOUT INDORSEMENT: RIGHT TO COMPEL9

INDORSEMENT. The transferee of a negotiable tangible document of title has a specifically10

enforceable right to have its transferor supply any necessary indorsement, but the transfer11

becomes a negotiation only as of the time the indorsement is supplied.12



Changes: Limited to tangible documents of title.1718

Purposes:1920

1. This section is limited to tangible documents of title as the concept of indorsement is21irrelevant to electronic documents of title. Electronic documents of title will be transferred by22delivery of control. Section 7-106. From a commercial point of view the intention to transfer a23tangible negotiable document of title which requires an indorsement for its transfer, is24incompatible with an intention to withhold such indorsement and so defeat the effective use of25the document. Further, the preceding section and the Comment thereto make it clear that an26indorsement generally imposes no responsibility on the indorser.27

2. Although this section provides that delivery of a tangible document of title without the28necessary indorsement is effective as a transfer, the transferee, of course, has not regularized its 29position until such indorsement is supplied. Until this is done the transferee cannot claim rights30under due negotiation within the requirements of this Article (Section 7-501(a)(5)) on "due31negotiation". Similarly, despite the transfer to the transferee of the transferor's title, the32transferee cannot demand the goods from the bailee until the negotiation has been completed and33the document is in proper form for surrender. See Section 7-403(c).34

35Cross References:36Point 1: Sections 7-106 and 7-505.37Point 2: Sections 7-501(4) and 7-403(2).38

74

Definitional Cross References:1"Document of title". Section 1-201.2"Rights". Section 1-201.3

45

SECTION 7-507. WARRANTIES ON NEGOTIATION OR DELIVERY OF6

DOCUMENT OF TITLE. If a person negotiates or delivers a document of title for value,7

otherwise than as a mere intermediary under Section 7-508, unless otherwise agreed, the8

transferor warrants to its immediate purchaser only in addition to any warranty made in selling or9

leasing the goods that:10

(1) the document is genuine; 11

(2) the transferor does not have knowledge of any fact that would impair the document’s12

validity or worth; and13

(3) the negotiation or delivery is rightful and fully effective with respect to the title to the14

document and the goods it represents.15



Changes: Substitution of the word “delivery” for the word “transfer,” reference leasing20transactions and style.21

22Purposes:23

1. Delivery of goods by use of a document of title does not limit or displace the ordinary24obligations of a seller or lessor as to any warranties regarding the goods that arises under other25law. If the transfer of documents attends or follows the making of a contract for the sale or lease26of goods, the general obligations on warranties as to the goods (Sections 2-312 through 2-31827and Sections 2A-210 through 2A-316) are brought to bear as well as the special warranties under28this section.29

2. The limited warranties of a delivering or collecting intermediary, including a collecting30bank, are stated in Section 7-508.31

32Cross References:33

75

Point 1: Sections 2-312 through 2-318 and 2A-310-through 2A-316.1Point 2: Section 7-508.2

3Definitional Cross References:4“Delivery”. Section 1-201.5"Document of title". Section 1-201.6"Genuine". Section 1-201.7"Goods". Section 7-102.8"Person". Section 1-201.9"Purchaser". Section 1-201.10"Value". Section 1-204.11

1213

SECTION 7-508. WARRANTIES OF COLLECTING BANK AS TO DOCUMENTS14

OF TITLE. A collecting bank or other intermediary known to be entrusted with documents of15

title on behalf of another or with collection of a draft or other claim against delivery of16

documents warrants by the delivery of the documents only its own good faith and authority even17

if the collecting bank or other intermediary has purchased or made advances against the claim or18

draft to be collected.19




Purposes:261. To state the limited warranties given with respect to the documents accompanying a27

documentary draft.28 2. In warranting its authority a collecting bank or other intermediary only warrants its29

authority from its transferor. See Section 4-203. It does not warrant the genuineness or30effectiveness of the document. Compare Section 7-507.31

3. Other duties and rights of banks handling documentary drafts for collection are stated in32Article 4, Part 5. On the meaning of draft, see Section 4-104 and Section 5-103, comment 11.33

34Cross References:35Sections 4-104, 4-203, 4-501 through 4-504, 5-103, and 7-507.36

37Definitional Cross References:38

76

"Collecting bank". Section 4-105.1"Delivery". Section 1-201.2“Document of title”. Section 1-102.3“Documentary draft”. Section 4-104.4“Intermediary bank”. Section 4-105.5"Good faith". Section 1-201 [7-102.]6

78

SECTION 7-509. ADEQUATE COMPLIANCE WITH COMMERCIAL CONTRACT. 9

Whether a document of title is adequate to fulfill the obligations of a contract for sale, a contract10

for lease, or the conditions of a letter of credit is determined by Article 2, 2A, or 5.11



Changes: To reference Article 2A.1617

Purposes:18To cross-refer to the Articles of this Act which deal with the substantive issues of the type of19

document of title required under the contract entered into by the parties.2021

Cross References: Articles 2, 2A and 5.2223

Definitional Cross References:24"Contract for sale". Section 2-106.25“Document of title”. Section 1-201.26“Lease”. Section 2A-103.27

28

77

PART 61

WAREHOUSE RECEIPTS AND BILLS OF LADING: MISCELLANEOUS2

PROVISIONS3

4

SECTION 7-601. LOST, STOLEN, OR DESTROYED DOCUMENTS OF TITLE.5

(a) If a document of title is lost, stolen, or destroyed, a court may order delivery of the6

goods or issuance of a substitute document and the bailee may without liability to any person7

comply with the order. If the document was negotiable, a court may not order delivery of the8

goods or issuance of a substitute document without the claimant’s posting security unless it finds9

that any person that may suffer loss as a result of nonsurrender of possession or control of the10

document is adequately protected against the loss. If the document was nonnegotiable, the court11

may require security. The court may also order payment of the bailee's reasonable costs and12

attorney’s fees in any action under this subsection.13

(b) A bailee that without court order delivers goods to a person claiming under a missing14

negotiable document of title is liable to any person injured thereby. If the delivery is not in good15

faith, the bailee is liable for conversion. Delivery in good faith is not conversion if the claimant16

posts security with the bailee in an amount at least double the value of the goods at the time of17

posting to indemnify any person injured by the delivery which files a notice of claim within one18

year after the delivery.19



Changes: To accommodate electronic documents; to provide flexibility to courts similar to the24

78

flexibility in Section 3-309; to update to the modern era of deregulation; and for style.12

Purposes:34

1. Subsection (a) authorizes courts to order compulsory delivery of the goods or compulsory5issuance of a substitute document. Compare Section 7-402. Using language similar to that6found in Section 3-309, courts are given discretion as to what is adequate protection when the7lost, stolen or destroyed document was negotiable or whether security should be required when8the lost, stolen or destroyed document was nonnegotiable. In determining whether a party is9adequately protected against loss in the case of a negotiable document, the court should consider10the likelihood that the party will suffer a loss. The court is also given discretion as to the bailee’s11costs and attorney fees. The rights and obligations of a bailee under this section depend upon12whether the document of title is lost, stolen or destroyed and is in addition to the ability of the13bailee to bring an action for interpleader. See Section 7-603.14

2. Courts have the authority under this section to order a substitute document for either15tangible or electronic documents. If the substitute document will be in a different medium than16the original document, the court should fashion its order in light of the requirements of Section 7-17105.18

3. Subsection (b) follows prior Section 7-601 in recognizing the legality of the well19established commercial practice of bailees making delivery in good faith when they are satisfied 20that the claimant is the person entitled under a missing (i.e. lost , stolen, or destroyed) negotiable21document. Acting without a court order, the bailee remains liable on the original negotiable22document and, to avoid conversion liability, the bailee may insist that the claimant provide an23indemnity bond. Cf. Section 7-403.24

4. Claimants on non-negotiable instruments are permitted to avail themselves of the25subsection (a) procedure because straight (non-negotiable) bills of lading sometimes contain26provisions that the goods shall not be delivered except upon production of the bill. If the carrier27should choose to insist upon production of the bill, the consignee should have some means of28compelling delivery on satisfactory proof of entitlement. Without a court order, a bailee may29deliver, subject to Section 7-403, to a person claiming goods under a non-negotiable document30that the same person claims is lost, stolen, or destroyed.31

5. The bailee’s lien should be protected when a court orders delivery of the goods pursuant32to this section.33

34Cross References:35Point 1: Sections 3-309, 7-402 and 7-603.36Point 2: Section 7-105.37Point 3: Section 7-403.38Point 4: Section 7-403.39Point 5: Sections 7-209 and 7-307.40

41Definitional Cross References:42"Bailee". Section 7-102.43

79

"Delivery". Section 1-201.1“Document of title”. Section 1-201.2"Good faith". Section 1-201 [7-102].3"Goods". Section 7-102.4"Person". Section 1-201.5

67

SECTION 7-602. ATTACHMENT OF GOODS COVERED BY NEGOTIABLE8

DOCUMENT OF TITLE. Unless a document of title was originally issued upon delivery of9

the goods by a person that did not have power to dispose of them, a lien does not attach by virtue10

of any judicial process to goods in the possession of a bailee for which a negotiable document of11

title is outstanding unless possession or control of the document is first surrendered to the bailee12

or the document’s negotiation is enjoined. The bailee may not be compelled to deliver the goods13

pursuant to process until possession or control of the document is surrendered to the bailee or to 14

the court. A purchaser of the document for value without notice of the process or injunction15

takes free of the lien imposed by judicial process.16


Prior Uniform Statutory Provisions: Former Section 7-602.1920

Changes: Changes to accommodate electronic documents of title and for style.2122

Purposes:231. The purpose of the section is to protect the bailee from conflicting claims of the document24

of title holder and the judgment creditors of the person who deposited the goods. The rights of25the former prevail unless, in effect, the judgment creditors immobilize the negotiable document26of title through the surrender of possession of a tangible document or control of an electronic27document. However, if the document of title was issued upon deposit of the goods by a person28who had no power to dispose of the goods so that the document is ineffective to pass title,29judgment liens are valid to the extent of the debtor's interest in the goods.30

2. The last sentence covers the possibility that the holder of a document who has been31enjoined from negotiating it will violate the injunction by negotiating to an innocent purchaser32for value. In such case the lien will be defeated.33

34

80

Cross Reference:1Sections 7-106 and 7-503.2

3Definitional Cross References:4"Bailee". Section 7-102.5"Delivery". Section 1-201.6“Document of title”. Section 1-201.7"Goods". Section 7-102.8"Notice". Section 1-202.9"Person". Section 1-201.10"Purchase". Section 1-201.11"Value". Section 1-204.12

1314

SECTION 7-603. CONFLICTING CLAIMS; INTERPLEADER. If more than one15

person claims title to or possession of the goods, the bailee is excused from delivery until the16

bailee has a reasonable time to ascertain the validity of the adverse claims or to commence an17

action for interpleader. The bailee may assert an interpleader either in defending an action for18

nondelivery of the goods or by original action.19


Prior Uniform Statutory Provisions: Former Section 7-603.2223


Purposes:261. The section enables a bailee faced with conflicting claims to the goods to compel the27

claimants to litigate their claims with each other rather than with the bailee. The bailee is28protected from legal liability when the bailee complies with court orders from the interpleader. 29See e.g. Northwestern National Sales, Inc. v. Commercial Cold Storage, Inc., 162 Ga.App. 741,30293 S.E.2d. 30 (1982).31

2. This section allows the bailee to bring an interpleader action but does not provide an32exclusive basis for allowing interpleader. If either state or federal procedural rules allow an33interpleader in other situations, the bailee may commence an interpleader under those rules. 34Even in an interpleader to which this section applies, the state or federal process of interpleader35applies to the bailee’s action for interpleader. For example, state or federal interpleader statutes36or rules may permit a bailee to protect its lien or to seek attorney’s fees and costs in the37interpleader action.38

81

Cross reference:1Point 1: Section 7-403.2

3Definitional Cross References:4"Action". Section 1-201.5"Bailee". Section 7-102.6"Delivery". Section 1-201.7"Goods". Section 7-102.8"Person". Section 1-201.9"Reasonable time". Section 1-205.10LEGISLATIVE NOTE: The following provisions should be used to apply to both the Article 711provisions and the conforming amendments to other articles of the Uniform Commercial Code12attached as Appendix I.13

14

82

PART 71

MISCELLANEOUS PROVISIONS2

3

SECTION 7-701. EFFECTIVE DATE. This [Act] takes effect on ______, 20___.4

5

SECTION 7-702. REPEALS. [Existing Article 7] and [Section 10-104 of the Uniform6

Commercial Code] are repealed.7


A state should repeal its prior version of Uniform Commercial Code Article 7 on documents10of title and Uniform Commercial Code section 10-204. The substance of Section 10-104 has11been incorporated into Section 7-103(b). 12

13

SECTION 7-703. APPLICABILITY. This [Act] applies to a document of title that is14

issued or a bailment that arises on or after the effective date of this [Act]. This [Act] does not15

apply to a document of title that is issued or a bailment that arises before the effective date of this16

[Act] even if the document of title or bailment would be subject to this [Act] if the document of17

title had been issued or bailment had arisen after the effective date of this [Act]. This [Act] does18

not apply to a right of action that has accrued before the effective date of this [Act].19


This Act will apply prospectively only to documents of title issued or bailments that arise22after the effective date of the Act.23

24252627

SECTION 7-704. SAVINGS CLAUSE. A document of title issued or a bailment that28

83

arises before the effective date of this [Act] and the rights, obligations, and interests flowing from1

that document or bailment are governed by any statute or other rule amended or repealed by this2

[Act] as if amendment or repeal had not occurred and may be terminated, completed,3

consummated, or enforced under that statute or other rule.4


This Act will apply prospectively only to documents of title issued or bailments that arise7after the effective date of the Act. To the extent that issues arise based upon documents of title8or rights or obligations that arise prior to the effective date of this Act, prior law will apply to9resolve those issues.10

11

84

Appendix I12

Amendments to Uniform Commercial Code Article 13ALTERNATIVE A4

5Legislative Note: These amendments should be adopted in the event a state has not yet adopted6Revised Article 1 as approved in 2001.7

8SECTION 1-201. GENERAL DEFINITIONS.9

Subject to additional definitions contained in the subsequent Articles of this Act which are10

applicable to specific Articles or Parts thereof, and unless the context otherwise requires, in this11

Act:12

* * * *13

(5) “Bearer” means a person in control of a negotiable electronic document of title or a the14

person in possession of an instrument, negotiable tangible document of title, or certificated15

security payable to bearer or indorsed in blank. 16

(6) “Bill of lading” means a document of title evidencing the receipt of goods for shipment17

issued by a person engaged in the business of directly or indirectly transporting or forwarding18

goods. The term does not include a warehouse receipt, and includes an airbill. “Airbill” means a19

document serving for air transportation as a bill of lading does for marine or rail transportation,20

and includes an air consignment note or air waybill.21

* * * *22

(10) “Conspicuous”: A term or clause is conspicuous when it is so written that a reasonable23

person against whom it is to operate ought to have noticed it. A printed heading in capitals (as:24

NON-NEGOTIABLE BILL OF LADING) is conspicuous. Language in the body of a form is25

“conspicuous” if it is in larger or other contrasting type or color. But in a telegram any stated26

85

term is “conspicuous”. Whether a term or clause is “conspicuous” or not is for decision by the1

court.2

(10) “Conspicuous”, with reference to a term, means so written, displayed, or presented that a3

reasonable person against which it is to operate ought to have noticed it. Whether a term is4

“conspicuous” or not is a decision for the court. Conspicuous terms include the following:5

(A) a heading in capitals equal to or greater in size than the surrounding text, or in6

contrasting type, font, or color to the surrounding text of the same or lesser size; and7

(B) language in the body of a record or display in larger type than the surrounding8

text, or in contrasting type, font, or color to the surrounding text of the same size, or set off from9

surrounding text of the same size by symbols or other marks that call attention to the language.10

* * * *11

(14) “Delivery” with respect to an electronic document of title means voluntary transfer of12

control and with respect to instruments, tangible documents of title, chattel paper, or certificated13

securities means voluntary transfer of possession.14

(15) “Document of title” includes bill of lading, dock warrant, dock receipt, warehouse15

receipt or order for the delivery of goods, and also any other means a record (i) that document16

which in the regular course of business or financing is treated as adequately evidencing that the17

person in possession or control of the record it is entitled to receive, control, hold, and dispose of18

the record document and the goods it the record covers and (ii) that purports to be issued by or19

addressed to a bailee and to cover goods in the bailee’s possession which are either identified or20

are fungible portions of an identified mass. The term includes a bill of lading, transport21

document, dock warrant, dock receipt, warehouse receipt, and order for delivery of goods. To be22

86

a document of title, a document must purport to be issued by or addressed to a bailee and purport1

to cover goods in the bailee’s possession which are either identified or are fungible portions of an2

identified mass. An electronic document of title is evidenced by a record consisting of3

information stored in an electronic medium. A tangible document of title is evidenced by a4

record consisting of information that is inscribed on a tangible medium.5

* * * * 6

(20) “Holder,” with respect to a negotiable instrument, means the person in possession if the7

instrument is payable to bearer or, in the case of an instrument payable to an identified person, if8

the identified person is in possession. “Holder” with respect to a document of title means the9

person in possession if the goods are deliverable to bearer or to the order of the person in10

possession.11

“Holder” means:12

(A) the person in possession of a negotiable instrument that is payable either to bearer13

or to an identified person that is the person in possession;14

(B) the person in possession of a negotiable tangible document of title if the goods are15

deliverable either to bearer or to the order of the person in possession; or16

(C) a person in control of a negotiable electronic document of title.17

* * * *18

(25) Subject to subsection (27), a A person has “notice” of a fact if the person when19

(a) he has actual knowledge of it; or20

(b) he has received a notice or notification of it; or21

(c) from all the facts and circumstances known to him the person at the time in question,22

87

he has reason to know that it exists.1

A person “knows” or has “knowledge” of a fact when the person he has actual knowledge of it. 2

“Discover” or “learn” or a word or phrase of similar import refers to knowledge rather than to3

reason to know. The time and circumstances under which a notice or notification may cease to4

be effective are not determined by this Act.5

(26) A person “notifies” or “gives” a notice or notification to another person by taking such6

steps as may be reasonably required to inform the other person in ordinary course, whether or not7

such other the other person actually comes to know of it. Subject to subsection (27), a A person8

“receives” a notice or notification when9

(a) it comes to his that person’s attention; or10

(b) it is duly delivered in a form reasonable under the circumstances at the place of11

business through which the contract was made or at another location any other place held out by12

that person him as the place for receipt of such communications.13

(27) Notice, knowledge, or a notice or notification received by an organization is effective for14

a particular transaction from the time when it is brought to the attention of the individual15

conducting that transaction, and in any event, from the time when it would have been brought to16

the individual’s his attention if the organization had exercised due diligence. An organization17

exercises due diligence if it maintains reasonable routines for communicating significant18

information to the person conducting the transaction and there is reasonable compliance with the19

routines. Due diligence does not require an individual acting for the organization to20

communicate information unless such communication is part of the individual’s his regular21

duties or the individual unless he has reason to know of the transaction and that the transaction22

88

would be materially affected by the information.1

* * * *2

(38) “Send” in connection with any writing or notice means to deposit in the mail or deliver3

for transmission by any other usual means of communication with postage or cost of4

transmission provided for and properly addressed and in the case of an instrument to an address5

specified thereon or otherwise agreed, or if there be none to any address reasonable under the6

circumstances. The receipt of any writing or notice within the time at which it would have7

arrived if properly sent has the effect of a proper signing.8

(38) “Send” in connection with a writing, record, or notice means:9

(A) to deposit in the mail or deliver for transmission by any other usual means of10

communication with postage or cost of transmission provided for and properly addressed and, in11

the case of an instrument, to an address specified thereon or otherwise agreed, or if there be none12

to any address reasonable under the circumstances; or 13

(B) in any other way to cause to be received any record or notice within the time it would14

have arrived if properly sent.15

* * * *16

(45) “Warehouse receipt” means a document of title receipt issued by a person engaged in the17

business of storing goods for hire.18

OFFICIAL COMMENT19* * * * 20

5. "Bea rer". From Section 19 1, Uniform Negotiab le Instruments L aw. The p rior definition h as been b roadene d. 21The term bearer applies to negotiable documents of title and has been broadened to include a person in control of an22electronic ne gotiable do cument of title. C ontrol in the co ntext of an elec tronic doc ument of title is de fined in Article237 (Section 7-106).24

6. "Bill of Lading". See similar definitions in Section 1, Uniform Bills of Lading Act. The definition has been25enlarged to include freight forwarders' bills and bills issued by contract carriers as well as those issued by common26carriers. The definition of airbill is new. A bill of lading is one type of document of title as defined in subsection27

89

(15). This definition should be read in conjunction with the definition of carrier in Article 7 (Section 7-102).1* * * *2

10. "Co nspicuous ". New. T his is intended to indicate som e of the metho ds of makin g a term attentio n-calling. 3But the test is whe ther attention ca n reasonab ly be expec ted to be ca lled to it. This definition states the general4standard tha t to be consp icuous a term ought to be noticed by a reasonab le person. W hether a term is conspicuo us is5an issue for the court. Subparagraphs (A) and (B) set out several methods for making a term conspicuous. Requiring6that a term be conspicuous blends a notice function (the term ought to be noticed) and a planning function (giving7guidance to the party relying on the term regarding how that result can be achieved). Although these paragraphs8indicate some of the methods for making a term attention-calling, the test is whether attention can reasonably be9expected to be called to it. The statuto ry language sh ould not b e construed to permit a re sult that is inconsisten t with10that test.11

* * * *1214. "Delivery". Section 76, Uniform Sales Act, Section 191, Uniform Negotiable Instruments Law, Section 58,13

Uniform W arehouse Receipts A ct and Sec tion 53, U niform Bills o f Lading Ac t. The de finition has bee n revised to14accomm odate elec tronic doc uments of title. Co ntrol in the con text of an electro nic docum ent of title is defined in15Article 7 (Section 7-106).16

15."Document of title". From Section 76, Uniform Sales Act, but rephrased to eliminate certain ambiguities. 17This definitio n makes ex plicit Thus, by m aking it explicit that the obligation or designation of a third party as18"bailee" is essential to a document, this definition and clearly rejects any such result as obtained in Hixson v. Ward,19254 Ill.Ap p. 505 (1 929), wh ich treated a c onditional sa les contract as a docum ent of title. Also the d efinition is left20open so that new types of documents may be included, including do cuments wh ich gain com mercial reco gnition in21the international arena. See UNCITRALDraft Instrument on Transport Law. It is unforeseeab le what doc uments22may one d ay serve the ess ential purpo se now filled b y warehous e receipts an d bills of lading . Truck transport has23already opened up problems which do not fit the patterns of practice resting upon the assumption that a draft can24move thro ugh bankin g channels faste r than the goo ds themselve s can reach their destination . There lie ah ead air25transport and such probabilities as teletype transmission of what may some day be regarded commercially as26"Doc uments of T itle". The definition is stated in terms of the function of the documents with the intention that any27docum ent which gain s comme rcial recogn ition as acco mplishing the d esired result sha ll be included within its scope. 28Fungible goods are adequately identified within the language of the definition by identification of the mass of which29they are a pa rt. 30

Dock warrants were within the Sales Act definition of document of title apparently for the purpose of31recognizing a valid tender b y means of such paper . In current commercial prac tice a dock warrant or rece ipt is a32kind of interim certificate issued by steamship shipping companies upon delivery of the goods at the dock, entitling a33designated person to have issued to him at the company's office to be issued a bill of lading. T he receipt itself is34invariably nonnegotiable in form although it may indicate that a negotiable bill is to be forthcoming. Such a35document is not within the general compass of the definition, although trade usage may in some cases entitle such36paper to be treated as a document of title. If the dock receipt actually represents a storage obligation undertaken by37the shipping company, then it is a warehouse receipt within this Section regardless of the name given to the38instrument.39

The goods must be "described", but the description may be by marks or labels and may be qualified in such a40way as to disclaim personal knowledge of the issuer regarding contents or condition. However, baggage and parcel41checks and similar "tokens" of storage which identify stored goods only as those received in exchange for the token42are not cov ered by this A rticle. The d efinition is broa d enough to include an airway bill. 43

A docum ent of title may be either tangible o r electronic. T angible do cuments of title sh ould be c onstrued to44mean trad itional pape r docum ents. Electron ic docum ents of title are do cuments that a re stored in a n electronic45medium instead of in tangible form. The concept of an electronic medium should be construed liberally to include46electronic, d igital, magnetic, o ptical, electrom agnetic, or an y other curren t or similar eme rging techno logies. As to47reissuing a do cument of title in a n alternative m edium, see A rticle 7, Sectio n 7-105. C ontrol for ele ctronic48documents of title is defined in Article 7 (Section 7-106).49

* * * *5019. "G ood faith" . See Sectio n 76(2), U niform Sale s Act; Section 58(2), U niform W arehouse Receipts A ct; 51

Section 53 (2), Unifor m Bills of La ding Act; Se ction 22(2 ), Uniform S tock Tra nsfer Act. "G ood faith" , whenever it52

90

is used in the Code, means at least what is here stated. In certain Articles, by specific provision, additional1requirements are made applicable. See, e.g., Secs. 2-103(1)(b), 7-404. To illustrate, in the Article on Sales, Section22-103, good faith is expressly defined as including in the case of a merchant observance of reasonable commercial3standards of fair dealing in the trade, so that throughout that Article wherever a merchant appears in the case an4inquiry into his observance of such standards is necessary to determine his good faith.5

20. "Holder". See similar definitions in Section 191, Uniform Negotiable Instruments Law; Section 58,6Uniform W arehouse Receipts A ct; Section 53 , Uniform B ills of Lading A ct. The de finition has bee n amende d to7provide for electronic negotiable documents of title.8

* * * *925. "Notice". New. Compare N.I.L. Sec. 56. Under the definition a person has notice when he has received a10

notification of the fact in question. But by the last sentence the act leaves open the time and circumstances under11which notice or notification may cease to be effective. Therefore such cases as Graham v. White-Phillips Co., 29612U.S. 27, 56 S.Ct. 21, 80 L.Ed. 20 (1935), are not overruled.13

26. "N otifies". New . This is the wor d used wh en the essential fac t is the prope r dispatch o f the notice, not its14receipt. Compare "Send". When the essential fact is the other party's receipt of the notice, that is stated. The second15sentence states when a notification is received.16

27. New. This makes clear that reason to know, knowledge, or a notification, although "received" for instance17by a clerk in Department A of an organization, is effective for a transaction conducted in Department B only from18the time when it was or should have been communicated to the individual conducting that transaction.19

A person has notice of a fact when, inter alia, the person has received a notification of the fact in question. The20word “notifies” is used when the essential fact is the proper dispatch of the notice, not its receipt. Compare “send.” 21When the essential fact is the other party’s receipt of the notice, that is stated. Subsection (26) states when a22notification is rec eived. Sub section (27 ) makes clea r that notice, kno wledge, or a notification, altho ugh “receive d,”23for instance, b y a clerk in De partment A of an organ ization, is effective fo r a transaction conducte d in Dep artment B24only from the tim e when it was o r should hav e been co mmunica ted to the indiv idual cond ucting that transa ction. 25

* * * *2638. "Se nd". Ne w. Comp are "notifies" . The de finition of send h as been m odified to a llow for electro nic27

dispatch.28* * * *29

45. "W arehouse receipt". Se e Section 7 6(1), Un iform Sales A ct; Section 1, U niform W arehouse Receipts A ct. 30Receipts issued by a field warehouse are included, provided the warehouseman and the depositor of the goods are31different perso ns. The definition makes clear that the receipt must qualify as a document of title under subsection32(15).33

34ALTERNATIVE B35

Legislative Note: These amendments should be used if the jurisdiction has enacted or is enacting36at the same time as this Act the provisions of Revised Article 1 as approved in 2001 .37

38SECTION 1-201. GENERAL DEFINITIONS.39

* * *40

(b) Subject to definitions contained in other articles of [the Uniform Commercial Code] that41

apply to particular articles or parts thereof:42

* * *43

(5) “Bearer” means a person in control of a negotiable electronic document of title or a44

91

person in possession of a negotiable instrument, a negotiable tangible document of title, or a1

certificated security that is payable to bearer or indorsed in blank. 2

(6) “Bill of lading” means a document of title evidencing the receipt of goods for3

shipment issued by a person engaged in the business of directly or indirectly transporting or4

forwarding goods. The term does not include a warehouse receipt.5

* * *6

(15) “Delivery”, with respect to an electronic document of title means voluntary transfer7

of control and with respect to an instrument, a tangible document of title, or chattel paper, means8

voluntary transfer of possession.9

(16) “Document of title” includes bill of lading, dock warrant, dock receipt, warehouse10

receipt or order for the delivery of goods, and also any other means a record (i) that document11

which in the regular course of business or financing is treated as adequately evidencing that the12

person in possession or control of the record it is entitled to receive, control, hold, and dispose of13

the record document and the goods it the record covers and (ii) that purports to be issued by or14

addressed to a bailee and to cover goods in the bailee’s possession which are either identified or15

are fungible portions of an identified mass. The term includes a bill of lading, transport16

document, dock warrant, dock receipt, warehouse receipt, and order for delivery of goods. To be17

a document of title, a document must purport to be issued by or addressed to a bailee and purport18

to cover goods in the bailee’s possession which are either identified or are fungible portions of an19

identified mass. An electronic document of title is evidenced by a record consisting of20

information stored in an electronic medium. A tangible document of title is evidenced by a21

record consisting of information that is inscribed on a tangible medium.22

92

* * *1

(21) “Holder” means:2

(A) the person in possession of a negotiable instrument that is payable either to bearer3

or to an identified person that is the person in possession; or4

(B) the person in possession of a negotiable tangible document of title if the goods are5

deliverable either to bearer or to the order of the person in possession; or6

(C) a person in control of a negotiable electronic document of title.7

* * * 8

(42) “Warehouse receipt” means a document of title receipt issued by a person engaged in9

the business of storing goods for hire.10

OFFICIAL COMMENT115. "Bea rer".Unc hanged, except in one respect, from former section 1-201, which was derived from Section 191,12

Uniform N egotiable In struments La w. The term bearer applies to negotiable documents of title and has been13broadened to include a person in control of an electronic negotiable document of title. Control in the context of an14electronic document of title is defined in Article 7 (Section 7-106).15

6. "Bill of Lading". Derived from former Section 1-201. The reference to, and definition of, an “airbill” has16been de leted as no lo nger neces sary. A bill of lading is one type of document of title as defined in subsection (16).17This definition should be read in conjunction with the definition of carrier in Article 7 (Section 7-102).18

* * * *1915. "D elivery". De rived from fo rmer Sec tion 1-201 . The refere nce to certifica ted securities ha s been de leted in20

light of the more specific treatm ent of the matter in Section 8 -301. The de finition has bee n revised to a ccomm odate21electronic documents of title. Control in the context of an electronic document of title is defined in Article 722(Section 7-106).23

16."D ocumen t of title". Unchanged Derived from former Section 1-201, which was derived from Section 76,24Uniform S ales Act. This definitio n makes ex plicit Thus, by m aking it explicit that the obligatio n or designa tion of a25third party as " bailee" is esse ntial to a doc ument of title , this definition and clearly rejects any such result as obtained26in Hixson v. Wa rd, 254 Ill.App. 50 5 (1929), which treated a conditional sales contract as a do cument of title. Also27the definition is left open so that new types of documents may be included, including do cuments wh ich gain28commercial recognition in the international arena. See UNCITRALDraft Instrument on Transport Law. It is29unforeseeable what documents may one day serve the essential purpose now filled by warehouse receipts and bills of30lading. Truck transport has already opened up problems which do not fit the patterns of practice resting upon the31assumption that a draft can m ove throug h banking c hannels faster tha n the good s themselves c an reach the ir32destination. There lie ahead air transport and such probabilities as teletype transmission of what may some day be33regarded comme rcially as "Do cuments of T itle". The de finition is stated in term s of the function o f the docum ents34with the intention that any document which gains commercial recognition as accomplishing the desired result shall be35included within its scope. Fungible goods are adequately identified within the language of the definition by36identification o f the mass of whic h they are a pa rt. 37

Dock warrants were within the Sales Act definition of document of title apparently for the purpose of38

93

recognizing a valid tender b y means of such paper . In current commercial prac tice a dock warrant or rece ipt is a1kind of interim certificate issued by steamship shipping companies upon delivery of the goods at the dock, entitling a2designated person to have issued to him at the company's office to be issued a bill of lading. T he receipt itself is3invariably nonnegotiable in form although it may indicate that a negotiable bill is to be forthcoming. Such a4document is not within the general compass of the definition, although trade usage may in some cases entitle such5paper to be treated as a document of title. If the dock receipt actually represents a storage obligation undertaken by6the shipping company, then it is a warehouse receipt within this Section regardless of the name given to the7instrument.8

The goods must be "described", but the description may be by marks or labels and may be qualified in such a9way as to disclaim personal knowledge of the issuer regarding contents or condition. However, baggage and parcel10checks and similar "tokens" of storage which identify stored goods only as those received in exchange for the token11are not cov ered by this A rticle. The d efinition is broa d enough to include an airway bill. 12

A docum ent of title may be either tangible o r electronic. T angible do cuments of title sh ould be c onstrued to13mean trad itional pape r docum ents. Electron ic docum ents of title are do cuments that a re stored in a n electronic14medium instead of in tangible form. The concept of an electronic medium should be construed liberally to include15electronic, d igital, magnetic, o ptical, electrom agnetic, or an y other curren t or similar eme rging techno logies. As to16reissuing a do cument of title in a n alternative m edium, see A rticle 7, Sectio n 7-105. C ontrol for ele ctronic17documents of title is defined in Article 7 (Section 7-106).18

* * * *1921. "H older". D erived from former Se ction 1-20 1. The d efinition has be en reorga nized for cla rity and amended20

to provide for electronic negotiable documents of title.21* * * *22

42. "W arehouse receipt". Unchanged Derived from former Section 1-201, which was derived from Section2376(1), Uniform Sales Act; Section 1, Uniform Warehouse Receipts Act. Receipts issued by a field warehouse are24included, p rovided the wareho useman an d the dep ositor of the go ods are d ifferent person s. The definition makes25clear that the receipt must qualify as a document of title under subsection (16).26

2728

Amendments to Uniform Commercial Code Article 229ALTERNATIVE A30

31Legislative Note: These amendments should be adopted in the event a state has not yet adopted32Amended Article 2 as approved in 2003. 33

34SECTION 2-103. DEFINITIONS AND INDEX OF DEFINITIONS.35

* * * * 36(3) The following definitions in other Articles apply to this Article:37

"Check". Section 3-104.38"Consignee". Section 7-102.39"Consignor". Section 7-102.40"Consumer Goods". Section 9-102.41“Control”. Section 7-106.42"Dishonor". Section 3-507.43"Draft". Section 3-104.44

OFFICIAL COMMENT45* * * *46

2. "Receipt" must be distinguished from delivery particularly in regard to the problems arising out of shipment47of goods, whether or not the contract calls for making delivery by way of documents of title, since the seller may48frequently fulfill his ob ligations to "d eliver" even though the b uyer may nev er "receive " the good s. Delivery with49

94

respect to d ocumen ts of title is defined in A rticle 1 and re quires transfer of physical de livery of a tangible document1of title and transfer of control o f an electronic docume nt of title. Otherwise the many divergent incidents of delivery2are handle d incident b y incident.3

45

SECTION 2-104. DEFINITIONS: “MERCHANT”; “BETWEEN MERCHANTS’;6“FINANCING AGENCY”.7

* * * *8

(2) "Financing agency" means a bank, finance company or other person who in the ordinary9

course of business makes advances against goods or documents of title or who by arrangement10

with either the seller or the buyer intervenes in ordinary course to make or collect payment due or11

claimed under the contract for sale, as by purchasing or paying the seller's draft or making12

advances against it or by merely taking it for collection whether or not documents of title13

accompany or are associated with the draft. "Financing agency" includes also a bank or other14

person who similarly intervenes between persons who are in the position of seller and buyer in15

respect to the goods (Section 2-707).16

* * * *17

SECTION 2-308. ABSENCE OF SPECIFIED PLACE FOR DELIVERY.18

OFFICIAL COMMENT19

3. Where "customary banking channels" call only for due notification by the banker that the documents are20available on hand, leaving the buyer himself to see to the physical receipt of the go ods, tender at the buyer's address21is not required under pa ragraph (c ). But that par agraph m erely eliminates th e possibility of a d efault by the seller if22"customary banking channels" have been properly used in giving notice to the buyer. Where the bank has purchased23a draft accompanied by or associate d with docume nts or has und ertaken its colle ction on be half of the seller, P art 524of Article 4 spells out its duties and relations to its customer. Where the documents move forward under a letter of25credit the Ar ticle on Letters o f Credit spells o ut the duties and relations betw een the ban k, the seller and the buyer. 26Delivery in relationship to either tangible or electronic documents of title is defined in Article 1, Section 1-201.27

SECTION 2-310. OPEN TIME FOR PAYMENT OR RUNNING OF CREDIT;28

AUTHORITY TO SHIP UNDER RESERVATION.29

Unless otherwise agreed30

95

(a) payment is due at the time and place at which the buyer is to receive the goods even1

though the place of shipment is the place of delivery; and2

(b) if the seller is authorized to send the goods he may ship them under reservation, and may3

tender the documents of title, but the buyer may inspect the goods after their arrival before4

payment is due unless such inspection is inconsistent with the terms of the contract (Section5

2-513); and6

(c) if delivery is authorized and made by way of documents of title otherwise than by7

subsection (b) then payment is due regardless of where the goods are to be received (i) at the time8

and place at which the buyer is to receive delivery of the tangible documents or (ii) at the time9

the buyer is to receive delivery of the electronic documents and at the seller’s place of business or10

if none, the seller’s residence regardless of where the goods are to be received; and11

(d) where the seller is required or authorized to ship the goods on credit the credit period runs12

from the time of shipment but post-dating the invoice or delaying its dispatch will13

correspondingly delay the starting of the credit period .14

OFFICIAL COMMENT15

* * * *162. Paragraph (b) while providing for inspection by the buyer before he pays, protects the seller. He is not17

required to give up possession of the goods until he has received payment, where no credit has been contemplated by18the parties. T he seller may c ollect through a bank by a sight draft against a n order b ill of lading "ho ld until arrival; 19inspection a llowed." T he obligatio ns of the bank under such a provision are set forth in P art 5 of Article 4. Under20subsection (c), in the absence of a credit term, the seller is permitted to ship under reservation and if he does payment21is then due where and when the buyer is to receive delivery of the tangible documents of title. In the case of an22electronic document of title, payment is due when the buyer is to receive delivery of the electronic document and at23the seller’s place of business, o r if none, the seller’s re sidence. D elivery as to do cuments of title is state d in Article241, Section 1-201.25

3. Unless otherwise agreed, the place for the receipt delivery of the docu ments and p ayment is the bu yer's city26but the time for payment is only after arrival of the goods, since under paragraph (b), and Sections 2-512 and 2-51327the buyer is under no duty to pay prior to inspection. Tende r of a docu ment of title requ ires that the seller b e ready,28willing and ab le to transfer po ssession of a tan gible doc ument of title or c ontrol of an e lectronic do cument of title to29the buyer.30

* * * * 31

96

SECTION 2-320. C.I.F. AND C. & F. TERMS.1

OFFICIAL COMMENT2

* * * *35. The se ller is given the op tion of paying o r providing for the paym ent of freight. He has no op tion to ship4

"freight collect" unless the agreement so provides. The rule of the common law that the buyer need not pay the5freight if the goods do not arrive is preserved.6

Unless the shipment has been sent "freight collect" the buyer is entitled to receive documentary evidence that he7is not obligated to pay the freight; the seller is therefore required to obtain a receipt "showing that the freight has8been paid or provided for." The usual notation in the appropriate space on the bill of lading that the freight has been9prepaid is a sufficient receipt, as at common law. The phrase "provided for" is intended to cover the frequent10situation in which the carrier extends credit to a shipper for the freight on successive shipments and receives11periodical payments of the accrued freight charges from him.12

* * * *1311. The buyer needs all of the documents required under a C.I.F. contract, in due form and , if a tangible14

document of title, with necessary endorsements, so that before the goods arrive he may deal with them by negotiating15the docum ents or may o btain prom pt possessio n of the goo ds after their arriv al. If the good s are lost or d amaged in16transit the documents are necessary to enable him promptly to assert his remedy against the carrier or insurer. The17seller is therefore obligated to do what is mercantilely reasonable in the circumstances and should make every18reasonable exertion to send forward the documents as soon as possible after the shipment. The requirement that the19documents be forwarded with "commercial promptness" expresses a more urgent need for action than that suggested20by the phrase "reasonable time".21

* * * *22

SECTION 2-323. FORM OF BILL OF LADING REQUIRED IN OVERSEAS23

SHIPMENT; "OVERSEAS".24

(1) Where the contract contemplates overseas shipment and contains a term C.I.F. or C. & F.25

or F.O.B. vessel, the seller unless otherwise agreed must obtain a negotiable bill of lading stating26

that the goods have been loaded in board or, in the case of a term C.I.F. or C. & F., received for27

shipment.28

(2) Where in a case within subsection (1) a tangible bill of lading has been issued in a set of29

parts, unless otherwise agreed if the documents are not to be sent from abroad the buyer may30

demand tender of the full set; otherwise only one part of the bill of lading need be tendered. 31

Even if the agreement expressly requires a full set32

(a) due tender of a single part is acceptable within the provisions of this Article on cure of33

97

improper delivery (subsection (1) of Section 2-508); and1

(b) even though the full set is demanded, if the documents are sent from abroad the2

person tendering an incomplete set may nevertheless require payment upon furnishing an3

indemnity which the buyer in good faith deems adequate.4

* * * *5

OFFICIAL COMMENT6

* * * *72. Subsec tion (2) dea ls with the prob lem of bills of lad ing covering deep wa ter shipmen ts, issued not as a single8

bill of lading but in a set of parts, each part referring to the other parts and the entire set constituting in commercial9practice and at law a single bill of lading. Commercial practice in international commerce is to accept and pay10against presentation of the first part of a set if the part is sent from overseas even though the contract of the buyer11requires pr esentation o f a full set of bills of lading provided adequa te indemnity for the missing pa rts is forthcomin g. 12In accord with the amend ment to Section 7-30 4, bills of lading in a set are limited to tangible bills.13

* * * *14

SECTION 2-401. PASSING OF TITLE; RESERVATION FOR SECURITY;15

LIMITED APPLICATION OF THIS SECTION. Each provision of this Article with regard16

to the rights, obligations and remedies of the seller, the buyer, purchasers or other third parties17

applies irrespective of title to the goods except where the provision refers to such title. Insofar as18

situations are not covered by the other provisions of this Article and matters concerning title19

become material the following rules apply:20

(1) Title to goods cannot pass under a contract for sale prior to their identification to the21

contract (Section 2-501), and unless otherwise explicitly agreed the buyer acquires by their22

identification a special property as limited by this Act. Any retention or reservation by the seller23

of the title (property) in goods shipped or delivered to the buyer is limited in effect to a24

reservation of a security interest. Subject to these provisions and to the provisions of the Article25

on Secured Transactions (Article 9), title to goods passes from the seller to the buyer in any26

98

manner and on any conditions explicitly agreed on by the parties.1

(2) Unless otherwise explicitly agreed title passes to the buyer at the time and place at which2

the seller completes his performance with reference to the physical delivery of the goods, despite3

any reservation of a security interest and even though a document of title is to be delivered at a4

different time or place; and in particular and despite any reservation of a security interest by the5

bill of lading6

(a) if the contract requires or authorizes the seller to send the goods to the buyer but does7

not require him to deliver them at destination, title passes to the buyer at the time and place of8

shipment; but9

(b) if the contract requires delivery at destination, title passes on tender there.10

(3) Unless otherwise explicitly agreed where delivery is to be made without moving the11

goods,12

(a) if the seller is to deliver a tangible document of title, title passes at the time when and13

the place where he delivers such documents and if the seller is to deliver an electronic document14

of title, title passes when the seller delivers the document; or15

(b) if the goods are at the time of contracting already identified and no documents of title16

are to be delivered, title passes at the time and place of contracting.17

(4) A rejection or other refusal by the buyer to receive or retain the goods, whether or not18

justified, or a justified revocation of acceptance revests title to the goods in the seller. Such19

revesting occurs by operation of law and is not a "sale".20

OFFICIAL COMMENT21

* * * *224. The factual situations in subsections (2) and (3) upon which passage of title turn actually base the test upon23

99

the time when the seller has finally committed himself in regard to specific goods. Thus in a "shipment" contract he1commits himself by the act of making the shipment. If shipment is not contemplated subsection (3) turns on the2seller's final comm itment, i.e. the delive ry of docum ents or the ma king of the co ntract. As to delive ry of an electro nic3document of title, see definition of delivery in Article 1, Section 1-201. This Article does not state a rule as to the4place of title passage as to goods covered by an electronic document of title.5

6

SECTIONS 2-403. POWER TO TRANSFER; GOOD FAITH PURCHASE OF GOODS;7

“ENTRUSTING”.8

OFFICIAL COMMENT9

* * * *102. The many particular situations in which a buyer in ordinary course of business from a dealer has been11

protected against reserva tion of prop erty or other h idden intere st are gathered by subsectio ns (2)-(4) into a single12principle protecting persons who buy in ordinary course out of inventory. Consignors have no reason to complain,13nor have lenders who hold a security interest in the inventory, since the very purpose of goods in inventory is to be14turned into cash by sale.15The prin ciple is extend ed in subsec tion (3) to fit with the a bolition of the old law of "c ash sale" by s ubsection (1 )(c). 16It is also freed from any technicalities depending on the extended law of larceny; such extension of the concept of17theft to include tric k, particular typ es of fraud, an d the like is for the p urpose o f helping con viction of the o ffender; 18it has no proper application to the long-standing policy of civil protection of buyers from persons guilty of such trick19or fraud. Fina lly, the policy is exten ded, in the inter est of simplicity and sense, to any en trusting by a ba ilor; this is20in consonance with the exp licit provisions of Section 7-205 o n the powers of a wareho useman who is also in the21business of buying and selling fungible goods of the kind he warehouses stores. As to entrusting b y a secured p arty,22subsection (2) is limited by the more specific provisions of Section 9-320, which deny protection to a person buying23farm products from a p erson engaged in farming o perations.24

* * * *25

SECTION 2-503. MANNER OF SELLER’S TENDER OF DELIVERY.26

* * * *27

(4) Where goods are in the possession of a bailee and are to be delivered without being28

moved29

(a) tender requires that the seller either tender a negotiable document of title covering30

such goods or procure acknowledgment by the bailee of the buyer's right to possession of the31

goods; but32

(b) tender to the buyer of a non-negotiable document of title or of a written direction to33

record directing the bailee to deliver is sufficient tender unless the buyer seasonably objects, and34

100

except as otherwise provided in Article 9 receipt by the bailee of notification of the buyer's rights1

fixes those rights as against the bailee and all third persons; but risk of loss of the goods and of2

any failure by the bailee to honor the non-negotiable document of title or to obey the direction3

remains on the seller until the buyer has had a reasonable time to present the document or4

direction, and a refusal by the bailee to honor the document or to obey the direction defeats the5

tender.6

(5) Where the contract requires the seller to deliver documents7

(a) he must tender all such documents in correct form, except as provided in this Article8

with respect to bills of lading in a set (subsection (2) of Section 2-323); and9

(b) tender through customary banking channels is sufficient and dishonor of a draft10

accompanying or associated with the documents constitutes non-acceptance or rejection.11

OFFICIAL COMMENT12

1. The m ajor gene ral rules gove rning the man ner of prop er or due te nder of de livery are gathe red in this section . 13The term "tender" is used in this Article in two different senses. In one sense it refers to "due tender" which14contemplates an offer coupled with a present ability to fulfill all the conditions resting on the tendering party and15must be follo wed by ac tual perform ance if the othe r party shows himself ready to proceed . Unless the context16unmistakably indicates otherwise this is the meaning of "tender" in this Article and the occasional addition of the17word "d ue" is only for c larity and emp hasis. At other tim es it is used to refer to an offer of go ods or d ocumen ts18under a contract as if in fulfillment of its conditions even though there is a defect when measured against the contract19obligation. Used in either sense, however, "tender" connotes such performance by the tendering party as puts the20other party in d efault if he fails to pro ceed in som e manner. These concepts of tender would apply to tender of either21tangible or electronic documents of title.22

* * * *237. Unde r subsection (5) docu ments are ne ver "requ ired" exc ept where the re is an expre ss contract term or it is24

plainly implicit in the peculiar circumstances of the case or in a usage of trade. Documents may, of course, be25"authorized" although not required, but such cases are not within the scope of this subsection. When documents are26required, there are three main requirements of this subsection: (1) "All": each required document is essential to a27proper tender; (2) "Such": the documents must be the ones actually required by the contract in terms of source and28substance; (3 ) "Corre ct form": All d ocumen ts must be in co rrect form. These re quiremen ts apply to bo th tangible29and electronic documents of title. When tender is made through customary banking channels, a draft may30accompany or be associated with a document of title. The language has been broadened to allow for drafts to be31associated with an electro nic docum ent of title. Com pare Sec tion 2-104 (2) definition o f financing agen cy. 32

When a prescribed document cannot be procured, a question of fact arises under the provision of this Article on33substituted performance as to whether the agreed manner of delivery is actually commercially impracticable and34whether the substitute is commercially reasonable.35

101

SECTION 2-505. SELLER’S SHIPMENT UNDER RESERVATION.1

(1) Where the seller has identified goods to the contract by or before shipment:2

(a) his procurement of a negotiable bill of lading to his own order or otherwise reserves in3

him a security interest in the goods. His procurement of the bill to the order of a financing4

agency or of the buyer indicates in addition only the seller's expectation of transferring that5

interest to the person named.6

(b) a non-negotiable bill of lading to himself or his nominee reserves possession of the7

goods as security but except in a case of conditional delivery (subsection (2) of Section 2-507) a8

non-negotiable bill of lading naming the buyer as consignee reserves no security interest even9

though the seller retains possession or control of the bill of lading.10

(2) When shipment by the seller with reservation of a security interest is in violation of the11

contract for sale it constitutes an improper contract for transportation within the preceding12

section but impairs neither the rights given to the buyer by shipment and identification of the13

goods to the contract nor the seller's powers as a holder of a negotiable document of title.14

OFFICIAL COMMENT15

* * * *165. Under subsection (2) an improper reservation by the seller which would constitute a breach in no way impairs17

such of the buyer's rights as result from identification of the goods. The security title reserved by the seller under18subsection (1) does no t protect his holding retaining po ssession or c ontrol of the document or the goods for the19purpose of exacting m ore than is du e him unde r the contrac t.20

2122

SECTION 2-506. RIGHTS OF FINANCING AGENCY.23

* * * *24

(2) The right to reimbursement of a financing agency which has in good faith honored or25

purchased the draft under commitment to or authority from the buyer is not impaired by26

102

subsequent discovery of defects with reference to any relevant document which was apparently1

regular on its face.2

OFFICIAL COMMENT3

* * * *4

5. The d eletion of the lan guage “on its face” from su bsection (2 ) is designed to accom modate e lectronic5docum ents of title without ch anging the req uirement of re gularity of the do cument.6

7

SECTION 2-509. RISK OF LOSS IN THE ABSENCE OF BREACH.8

* * * *9

(2) Where the goods are held by a bailee to be delivered without being moved, the risk of loss10

passes to the buyer11

(a) on his receipt of possession or control of a negotiable document of title covering the12

goods; or13

(b) on acknowledgment by the bailee of the buyer's right to possession of the goods; or14

(c) after his receipt of possession or control of a non-negotiable document of title or other15

written direction to deliver in a record, as provided in subsection (4)(b) of Section 2-503.16

* * * *17

OFFICIAL COMMENT18

* * * *194. Where the agreement provides for delivery of the goods as between the buyer and seller without removal from20

the physical possession of a bailee, the provisions on manner of tender of delivery apply on the point of transfer of21risk. Due delivery of a negotiable document of title covering the goods or acknowledgment by the bailee that he22holds for the buyer com pletes the "d elivery" and passes the risk. See definition of delivery in Article 1, Section 1-23201 and the definition of control in Article 7, Section 7-106.24

* * * *25

SECTION 2-513. BUYER’S RIGHT TO INSPECTION OF THE GOODS.26

OFFICIAL COMMENT27

103

* * * *15. In the case of payment against documents, subsection (3) requires payment before inspection, since shipping2

docum ents against whic h payment is to be made will commo nly arrive and be tendere d while the go ods are still in3transit. This Article recognizes no exception in any peculiar case in which the goods happen to arrive before the4documents are tendered. However, where by the agreement payment is to await the arrival of the goods, inspection5before pa yment beco mes prop er since the go ods are the n "availab le for inspectio n."6

Where by the agreement the documents are to be held to be tendered after until arrival of the goods, the buyer is7entitled to inspect before payment since the goods are then "available for inspection". Proof of usage is not8necessary to establish this right, but if inspection before payment is disputed the contrary must be established by9usage or b y an explicit co ntract term to tha t effect.10

For the same reason, that the goods are available for inspection, a term calling for payment against storage11documents or a delivery order does not normally bar the buyer's right to inspection before payment under subsection12(3)(b). This result is reinforced by the buyer's right under subsection (1) to inspect goods which have been13appropriated with notice to him.14

* * * *1516

SECTION 2-605. WAIVER OF BUYER’S OBJECTIONS BY FAILURE TO17

PARTICULARIZE.18

* * * *19

(2) Payment against documents made without reservation of rights precludes recovery of the20

payment for defects apparent on the face of in the documents.21

OFFICIAL COMMENT22

* * * *234. Subsection (2) applies to the particular case of documents the same principle which the section on effects of24

acceptance applies to the case of goods. The matter is dealt with in this section in terms of "waiver" of objections25rather than of right to revoke acceptance, partly to avoid any confusion with the problems of acceptance of goods26and partly because defects in documents which are not taken as grounds for rejection are generally minor ones. The27only defects c oncerned in the present su bsection ar e defects in the d ocumen ts which are ap parent. on their face. This28rule applies to both tangib le and electro nic docum ents of title. Wher e paymen t is required ag ainst the doc uments29they must be inspected before payment, and the payment then constitutes acceptance of the documents. Under the30section dealing with this problem, such acceptance of the documents does not constitute an acceptance of the goods31or impair any options or remedies of the buyer for their improper delivery. Where the documents are delivered32without requiring such contemporary action as payment from the buyer, the reason of the next section on what33constitutes acceptance of goods, applies. Their acceptance by non-objection is therefore postponed until after a34reasonab le time for their insp ection. In either situation, howe ver, the buyer "waives" o nly what is the defects35apparen t on the face of in the documents.36

37

SECTION 2-705. SELLER’S STOPPAGE OF DELIVERY IN TRANSIT OR38

OTHERWISE.39

104

* * * *1

(2) As against such buyer the seller may stop delivery until2

(a) receipt of the goods by the buyer; or3

(b) acknowledgment to the buyer by any bailee of the goods except a carrier that the4

bailee holds the goods for the buyer; or5

(c) such acknowledgment to the buyer by a carrier by reshipment or as a warehouseman; 6

or7

(d) negotiation to the buyer of any negotiable document of title covering the goods.8

(3)(a) To stop delivery the seller must so notify as to enable the bailee by reasonable9

diligence to prevent delivery of the goods.10

(b) After such notification the bailee must hold and deliver the goods according to the11

directions of the seller but the seller is liable to the bailee for any ensuing charges or damages.12

(c) If a negotiable document of title has been issued for goods the bailee is not obliged to13

obey a notification to stop until surrender of possession or control of the document.14

(d) A carrier who has issued a non-negotiable bill of lading is not obliged to obey a15

notification to stop received from a person other than the consignor.16

OFFICIAL COMMENT17

* * * *183. A diversion of a shipment is not a "reshipment" under subsection (2)(c) when it is merely an incident to the19

original contract of transportation. Nor is the procurement of "exchange bills" of lading which change only the name20of the consign ee to that of the b uyer's local agen t but do no t alter the destinatio n of a reshipm ent.21

Acknowledgm ent by the carrier as a "wareho useman" within the me aning of this Artic le requires a c ontract of a22truly different character from the original shipment, a contrac t not in extension of transit but as a warehouse man.23

4. Subsection (3)(c) makes the bailee's obedience of a notification to stop conditional upon the surrender of24possession or contro l of any outstand ing negotiab le docum ent.25

* * * *26

105

ALTERNATIVE B1

Legislative Note: These amendments should be used if the jurisdiction has enacted or is enacting2

at the same time as this Act the provisions of Amended Article 2 as approved in 2003 . [Note to3

readers–Proposed amendments to comments are not yet completed as the comments to Amended4

Article 2 are not yet complete. The proposed amendments to the Article 2 comments will parallel5

the proposed amendments to comments given in Alternative A.]6

7


* * * *9

(3) The following definitions in other Articles apply to this Article:10

"Check". Section 3–104(f).11

"Consumer goods". Section 9-102(a)(23).12

“Control”. Section 7-106.13

"Dishonor". Section 3–502.14

"Draft". Section 3–104(e).15

“Injunction against honor”. Section 5-109(b).16

“Letter of credit”. Section 5-102(a)(10).17

* * * *18

SECTION 2–104. DEFINITIONS: “MERCHANT”; “BETWEEN MERCHANTS”;19

“FINANCING AGENCY”.20

* * * *21

(2) "Financing agency" means a bank, finance company or other person that in the22

106

ordinary course of business makes advances against goods or documents of title or that by1

arrangement with either the seller or the buyer intervenes in ordinary course to make or collect2

payment due or claimed under the contract for sale, as by purchasing or paying the seller's draft3

or making advances against it or by merely taking it for collection whether or not documents of4

title accompany or are associated with the draft. "Financing agency" includes also a bank or5

other person that similarly intervenes between persons that are in the position of seller and buyer6

in respect to the goods (Section 2–707).7

* * * *8

SECTION 2–310. OPEN TIME FOR PAYMENT OR RUNNING OF CREDIT9

AUTHORITY TO SHIP UNDER RESERVATION.10

Unless otherwise agreed11

(a) payment is due at the time and place at which the buyer is to receive the goods even12

though the place of shipment is the place of delivery; and13

(b) if the seller is required or authorized to send the goods the seller may ship them under14

reservation, and may tender the documents of title, but the buyer may inspect the goods after their15

arrival before payment is due unless such inspection is inconsistent with the terms of the contract16

(Section 2–513); and17

(c) if tender of delivery is agreed to be made by way of documents of title otherwise than18

by subsection (b) then payment is due regardless of where the goods are to be received (i) at the19

time and place at which the buyer is to receive delivery of the tangible documents or (ii) at the20

time the buyer is to receive delivery of the electronic documents and at the seller’s place of21

business or if none, the seller’s residence regardless of where the goods are to be received; and22

107

(d) where the seller is required or authorized to ship the goods on credit the credit period1

runs from the time of shipment but post-dating the invoice or delaying its dispatch will2

correspondingly delay the starting of the credit period.3

4

SECTION 2–401. PASSING OF TITLE; RESERVATION FOR SECURITY;5

LIMITED APPLICATION OF THIS SECTION.6

* * * *7

(3) Unless otherwise explicitly agreed where delivery is to be made without moving the8

goods,9

(a) if the seller is to deliver a tangible document of title, title passes at the time when10

and the place where the seller delivers such documents and if the seller is to deliver an electronic11

document of title, title passes when the seller delivers the document; or12

(b) if the goods are at the time of contracting already identified and no documents are13

to be delivered, title passes at the time and place of contracting.14

* * * *15

SECTION 2-503. MANNER OF SELLER’S TENDER OF DELIVERY.16

* * * *17

(5) Where the contract requires the seller to deliver documents18

(a) the seller must tender all such documents in correct form; and19

(b) tender through customary banking channels is sufficient and dishonor of a draft20

accompanying or associated with the documents constitutes non-acceptance or rejection.21

22

108

SECTION 2–505. SELLER’S SHIPMENT UNDER RESERVATION.1

(1) Where the seller has identified goods to the contract by or before shipment:2

(a) the seller’s procurement of a negotiable bill of lading to the seller’s own order or3

otherwise reserves in the seller a security interest in the goods. The seller’s procurement of the4

bill to the order of a financing agency or of the buyer indicates in addition only the seller's5

expectation of transferring that interest to the person named.6

(b) a non-negotiable bill of lading to the seller or the seller’s nominee reserves possession7

of the goods as security but except in a case when a seller has a right to reclaim the goods under8

subsection (2) of Section 2–507 a non-negotiable bill of lading naming the buyer as consignee9

reserves no security interest even though the seller retains possession or control of the bill of10

lading.11

(2) When shipment by the seller with reservation of a security interest is in violation of the12

contract for sale, it constitutes an improper contract for transportation within the preceding13

section but impairs neither the rights given to the buyer by shipment and identification of the14

goods to the contract nor the seller's powers as a holder of a negotiable document of title.15

16

SECTION 2-506. RIGHTS OF FINANCING AGENCY.17

* * * *18

(2) The right to reimbursement of a financing agency which has in good faith honored or19

purchased the draft under commitment to or authority from the buyer is not impaired by20

subsequent discovery of defects with reference to any relevant document which was apparently21

regular on its face.22

109

SECTION 2-509. RISK OF LOSS IN THE ABSENCE OF BREACH.1

* * * *2

(2) Where the goods are held by a bailee to be delivered without being moved, the risk of loss3

passes to the buyer4

(a) on the buyer’s receipt of possession or control of a negotiable document of title5

covering the goods; or6

(b) on acknowledgment by the bailee to the buyer of the buyer's right to possession of the7

goods; or8

(c) after the buyer’s receipt of possession or control of a non-negotiable document of title9

or other direction to deliver in a record, as provided in subsection (4)(b) of Section 2–503.10

* * * *11

SECTION 2-605. WAIVER OF BUYER’S OBJECTIONS BY FAILURE TO12

PARTICULARIZE.13

* * * *14

(2) A buyer’s payment against documents tendered to the buyer made without reservation of15

rights precludes recovery of the payment for defects apparent on the face of in the documents.16

17

SECTION 2-705. SELLER’S STOPPAGE OF DELIVERY IN TRANSIT OR18

OTHERWISE.19

* * * *20

(2) As against such buyer the seller may stop delivery until21

(a) receipt of the goods by the buyer; or22

110

(b) acknowledgment to the buyer by any bailee of the goods, except a carrier, that the1

bailee holds the goods for the buyer; or2

(c) such acknowledgment to the buyer by a carrier by reshipment or as a warehouseman; 3

or4

(d) negotiation to the buyer of any negotiable document of title covering the goods.5

(3)(a) To stop delivery the seller must so notify as to enable the bailee by reasonable6

diligence to prevent delivery of the goods.7

(b) After such notification the bailee must hold and deliver the goods according to the8

directions of the seller but the seller is liable to the bailee for any ensuing charges or damages.9

(c) If a negotiable document of title has been issued for goods, the bailee is not obliged to10

obey a notification to stop until surrender of possession or control of the document.11

(d) A carrier that has issued a non-negotiable bill of lading is not obliged to obey a12

notification to stop received from a person other than the consignor.13

14

Amendments to Uniform Commercial Code Article 2A15

ALTERNATIVE A16

Legislative Note: These amendments should be used if the jurisdiction has not yet adopted17

Amended Article 2A as approved in 2003.18

SECTION 2A-103. DEFINITIONS AND INDEX OF DEFINITIONS.19

(1) In this Article unless the context otherwise requires:20

(a) "Buyer in ordinary course of business" means a person who in good faith and without21

knowledge that the sale to him [or her] is in violation of the ownership rights or security interest22

111

or leasehold interest of a third party in the goods, buys in ordinary course from a person in the1

business of selling goods of that kind but does not include a pawnbroker. "Buying" may be for2

cash or by exchange of other property or on secured or unsecured credit and includes receiving3

acquiring goods or documents of title under a pre-existing contract for sale but does not include4

a transfer in bulk or as security for or in total or partial satisfaction of a money debt.5

* * * *6

(o) "Lessee in ordinary course of business" means a person who in good faith and7

without knowledge that the lease to him [or her] is in violation of the ownership rights or security8

interest or leasehold interest of a third party in the goods leases in ordinary course from a person9

in the business of selling or leasing goods of that kind but does not include a pawnbroker. 10

"Leasing" may be for cash or by exchange of other property or on secured or unsecured credit and11

includes receiving acquiring goods or documents of title under a pre-existing lease contract but12

does not include a transfer in bulk or as security for or in total or partial satisfaction of a money13

debt.14

* * * *15

SECTION 2A-514. WAIVER OF LESSEE’S OBJECTIONS.16

* * * *17

(2) A lessee's failure to reserve rights when paying rent or other consideration against18

documents precludes recovery of the payment for defects apparent on the face of in the19

documents.20

21

22

112

SECTION 2A-526. LESSOR’S STOPPAGE OF DELIVERY IN TRANSIT OR1

OTHERWISE.2

* * * *3

(2) In pursuing its remedies under subsection (1), the lessor may stop delivery until4

(a) receipt of the goods by the lessee; 5

(b) acknowledgment to the lessee by any bailee of the goods, except a carrier, that the6

bailee holds the goods for the lessee; or 7

(c) such an acknowledgment to the lessee by a carrier via reshipment or as a warehouseman.8

* * * *9

ALTERNATIVE B10

Legislative Note: These amendments should be used if the jurisdiction has enacted or is11

enacting at the same time as this Act the provisions of Amended Article 2A as approved in 2003.12

13

SECTION 2A-514. WAIVER OF LESSEE’S OBJECTIONS.14

* * * *15

(2) A lessee's failure to reserve rights when paying rent or other consideration against16

documents precludes recovery of the payment for defects apparent on the face of in the17

documents.18

19

SECTION 2A–526. LESSOR’S STOPPAGE OF DELIVERY IN TRANSIT OR20

OTHERWISE.21

* * * *22

113

(2) In pursuing its remedies under subsection (1), the lessor may stop delivery until1

(a) receipt of the goods by the lessee;2

(b) acknowledgment to the lessee by any bailee of the goods, except a carrier, that the3

bailee holds the goods for the lessee; or4

(c) such an acknowledgment to the lessee by a carrier via reshipment or as a 5

warehouseman.6

* * * *7



* * * *10

(c) The following definitions in other Articles apply to this Article:11

"Acceptance" Section 3-40912

"Alteration" Section 3-40713

"Cashier's check" Section 3-10414

"Certificate of deposit" Section 3-10415

"Certified check" Section 3-40916

"Check" Section 3-10417

“Control” Section 7-10618

"Good faith" Section 3-10319

"Holder in due course" Section 3-30220

"Instrument" Section 3-10421

"Notice of dishonor" Section 3-50322

114

"Order" Section 3-103 1

"Ordinary care" Section 3-1032

"Person entitled to enforce" Section 3-3013

"Presentment" Section 3-5014

"Promise" Section 3-1035

"Prove" Section 3-1036

"Teller's check" Section 3-1047

"Unauthorized signature" Section 3-4038

OFFICIAL COMMENT9

* * * *105. Paragraph (a)(6): "Documentary draft" applies even though the documents do not accompany the draft but11

are to be re ceived by th e drawee or other pa yor before acceptan ce or paym ent of the draft. Documents may be either12in electronic or tangible form. See Article 5, Section 5-102, Comment 2 and Article 1, Section 1-201 (definition of13“document of title”).14

* * * *15

SECTION 4-210. SECURITY INTEREST OF COLLECTING BANK IN ITEMS,16

ACCOMPANYING DOCUMENTS AND PROCEEDS.17

(a) A collecting bank has a security interest in an item and any accompanying documents or18

the proceeds of either:19

(1) in case of an item deposited in an account, to the extent to which credit given for the20

item has been withdrawn or applied;21

(2) in case of an item for which it has given credit available for withdrawal as of right, to22

the extent of the credit given, whether or not the credit is drawn upon or there is a right of23

charge-back; or24

(3) if it makes an advance on or against the item.25

115

(b) If credit given for several items received at one time or pursuant to a single agreement is1

withdrawn or applied in part, the security interest remains upon all the items, any accompanying2

documents or the proceeds of either. For the purpose of this section, credits first given are first3

withdrawn.4

(c) Receipt by a collecting bank of a final settlement for an item is a realization on its5

security interest in the item, accompanying documents, and proceeds. So long as the bank does6

not receive final settlement for the item or give up possession of the item or possession or7

control of the accompanying documents for purposes other than collection, the security interest8

continues to that extent and is subject to Article 9, but:9

(1) no security agreement is necessary to make the security interest enforceable (Section 10

9-203(b)(3)(A)); 11

(2) no filing is required to perfect the security interest; and12

(3) the security interest has priority over conflicting perfected security interests in the13

item, accompanying documents, or proceeds.14

15

SECTION 4-501. HANDLING OF DOCUMENTARY DRAFTS; DUTY TO SEND FOR16

PRESENTMENT AND TO NOTIFY CUSTOMER OF DISHONOR.17

* * * *18

OFFICIAL COMMENT19

This sectio n states the duty o f a bank han dling a doc umentary d raft for a custom er. "Doc umentary d raft" is20defined in Section 4-104. The duty stated exists even if the bank has bought the draft. This is because to the21customer the draft normally represents an underlying commercial transaction, and if that is not going through as22planned th e custome r should kno w it promp tly. An electronic document of title may be presented through allowing23access to the docume nt or delivery o f the docum ent. Article 1, S ection 1-20 1 (definition o f “delivery”).24

SECTION 4-503. RESPONSIBILITY OF PRESENTING BANK FOR DOCUMENTS25

116

AND GOODS; REPORT OF REASONS FOR DISHONOR; REFEREE IN CASE OF1

NEED.2

* * * *3

OFFICIAL COMMENT4

1. This section states the rules governing, in the absen ce of instructions, the duty of the presenting bank in case5either of honor or of dishonor of a documentary draft. The section should be read in connection with Section 2-5146on when d ocumen ts are delivera ble on acc eptance, wh en on paym ent. In the case of a dishonor of the draft, the7bank, subj ect to Sectio n 4-504, m ust return po ssession or c ontrol of the d ocumen ts to its principal.8

2. If the draft is drawn under a letter of credit, Article 5 controls. See Sections 5-109 through 5-114.9

10


SECTION 5-102. DEFINITIONS.12

* * * *13

OFFICIAL COMMENT14

* * * *152. The definition of "document" contemplates and facilitates the growing recognition of electronic and other16

nonpap er media a s "docum ents," howe ver, for the time b eing, data in tho se media c onstitute doc uments only in17certain circumstances. For example, a facsimile received by an issuer would be a document only if the letter of18credit explicitly permitted it, if the standard practice authorized it and the letter did not prohibit it, or the agreement19of the issuer and beneficiary permitted it. The fact that data transmitted in a nonpaper (unwritten) medium can be20recorded on paper by a recipient's computer printer, facsimile machine, or the like does not under current practice21render the d ata so transm itted a "do cument." A facsimile or S.W .I.F.T. mes sage receive d directly by the issuer is in22an electronic medium when it crosses the boundary of the issuer's place of business. One wishing to make a23presentation by facsimile (an electronic medium) will have to procure the explicit agreement of the issuer (assuming24that the standar d practice does not a uthorize it). Article 5 contemplates that electronic documents may be presented25under a letter of credit and the provisions of this Article should be read to apply to electronic documents as well as26tangible documents. An electronic document of title is delivered through the voluntary transfer of control. Article 1,27Section 1-2 01 (definitio n of “delivery” ). See Article 7 , Section 7-1 06 on co ntrol of an elec tronic doc ument. Where28electronic tra nsmissions are authorized neither by the lette r of credit no r by the prac tice, the benefic iary may transm it29the data elec tronically to its age nt who may b e able to pu t it in written form and make a co nforming p resentation. Cf.30Article 7, Section 7-105 on reissuing an electronic document in a tangible medium.31

* * * *32

SECTION 5-108. ISSUER’S RIGHTS AND OBLIGATIONS.33

* * * *34

OFFICIAL COMMENT35

117

* * * *12. Section 5 -108(a) b alances the ne ed of the issuer for time to exa mine the do cuments ag ainst the possib ility2

that the exam iner (at the urging of the applica nt or for fear tha t it will not be reimb ursed) will take excessive time to3search for defects. What is a "reasonable time" is not extended to accommodate an issuer's procuring a waiver from4the applicant. See Article 14c of the UCP.5

Under both the UCC and the UCP the issuer has a reasonable time to honor or give notice. The outside limit of6that time is measu red in busine ss days unde r the UCC and in bank ing days und er the UC P, a differenc e that will7rarely be significant. Neither business nor banking days are defined in Article 5, but a court may find useful8analogies in Regulation CC, 12 CFR 229.2, in state law outside of the Uniform Commercial Code, and in Article 4.9

Examiners must note that the seven-day period is not a safe harbor. The time within which the issuer must give10notice is the lesser of a reasonable time or seven business days. Where there are few documents (as, for example,11with the mine run standby letter of credit), the reasonable time would be less than seven days. If more than a12reasonable time is consumed in examination, no timely notice is possible. What is a "reasonable time" is to be13determined by examining the behavior of those in the business of examining documents, mostly banks. Absent prior14agreement of the issuer, one could not expect a bank issuer to examine documents while the beneficiary waited in the15lobby if the normal practice was to give the documents to a p erson who had the o pportunity to examine those16togethe r wit h ma ny o ther s in a n or der ly pr oce ss. T hat t he a ppl ican t has not yet p aid the i ssue r or that the a ppl ican t's17account with the issuer is insufficient to cover the amount of the draft is not a basis for extension of the time period.18

This section does not preclude the issuer from contacting the applicant during its examination; however, the19decision to honor rests with the issuer, and it has no duty to seek a waiver from the applicant or to notify the20applicant of receipt of the documents. If the issuer dishonors a conforming presentation, the beneficiary will be21entitled to the remedies under S ection 5-111, irrespective o f the applicant's views.22

Even thou gh the perso n to whom presentation is made can not cond uct a reason able exam ination of do cuments23within the time after presentation and before the expiration date, presentation establishes the parties' rights. The24beneficiary's right to honor or the issuer's right to dishonor arises upon presentation at the place provided in the letter25of credit even though it might take the person to whom presentation has been made several days to determine26whether honor or dishonor is the proper course. The issuer's time for honor or giving notice of dishonor may be27extended or shorten ed by a term in the letter of credit. The time for the issuer's perform ance may be otherw ise28modified or waived in accordance with Section 5-106.29

The issuer's time to inspect runs from the time of its "receipt of documents." Documents are considered to be30received only when they are received at the place specified for presentation by the issuer or other party to whom31presentatio n is made. “Receipt of documents” when documents of title are presented must be read in light of the32definition of “delivery” in Article 1, Section 1-201 and the definition of “presentment” in Section 5-102(a)(12).33

Failure of the issuer to act within the time permitted by subsection (b) constitutes dishonor. Because of the34preclusion in subsection (c) and the liability that the issuer may incur under Section 5-111 for wrongful dishonor, the35effect of such a silent dishonor may ultimately be the same as though the issuer had honored, i.e., it may owe36damage s in the amou nt drawn bu t unpaid und er the letter of cre dit.37

* * * *3813. The last clause of Section 5-108(i)(5) deals with a special case in which the fraud is not committed by the39

beneficiary, but is committed by a stranger to the transaction who forges the beneficiary's signature. If the issuer40pays against documents on which a required signature of the beneficiary is forged, it remains liable to the true41beneficiary. This principal is applicable to both electronic and tangible d ocuments.42

* * * *43

SECTION 5-113. TRANSFER BY OPERATION OF LAW.44

* * * *45

OFFICIAL COMMENT46

This sectio n affirms the result in P astor v. Na t. Republic B ank of Chic ago, 76 Ill.2 d 139, 3 90 N.E .2d 894 (Ill.471979) and Fed eral Dep osit Insurance Co. v. Ba nk of Bo ulder, 911 F.2d 14 66 (10th Cir. 1990 ). Both electronic and48

118

tangible documents may be signed.1An issuer's requirements for recognition of a successor's status might include presentation of a certificate of2

merger, a court order appointing a bankruptcy trustee or receiver, a certificate of appointment as bankruptcy trustee,3or the like. Th e issuer is entitled to rely upon suc h docum ents which on their face dem onstrate that p resentation is4made by a successor of a beneficiary. It is not obliged to make an independent investigation to determine the fact of5succession.6

7


SECTION 8-103. RULES FOR DETERMINING WHETHER CERTAIN OBLIGATIONS9

AND INTERESTS ARE SECURITIES OF FINANCIAL ASSETS.10

* * * *11

(g) A document of title, as defined in Section 1-201 (15) [16], is not a financial asset unless12

Section 8-102(a)(9)(iii) applies.13

OFFICIAL COMMENT14

* * * *158. Subsection (g) allows a document of title to be a financial asset and thus subject to the indirect holding system16

rules of Part 5 only to the extent that the intermediary and the person entitled under the document agree to do so. This17is to prevent the inadvertent application of the Part 5 ru les to intermed iaries who m ay hold either electronic o r tangible18documents of title.19

20



(a) [Article 9 definitions.] In this article:23

* * * *24

(30) “Document” means a document of title or a receipt of the type described in Section 7-25

201(2) 7-201(b).26

* * * *27

119

(b) [Definitions in other articles.] The following definitions in other articles apply to this article:1

"Applicant". Section 5-102. 2

"Beneficiary". Section 5-102. 3

"Broker". Section 8-102. 4

"Certificated security". Section 8-102. 5

"Check". Section 3-104. 6

"Clearing corporation". Section 8-102. 7

"Contract for sale". Section 2-106. 8

“Control” (with respect to a document of title) Section 7-106.9

"Customer". Section 4-104. 10

"Entitlement holder". Section 8-102. 11

"Financial asset". Section 8-102. 12

"Holder in due course". Section 3-302. 13

"Issuer" (with respect to a letter of credit or letter-of-credit right). Section 5-102.14

"Issuer" (with respect to a security). Section 8-201. 15

"Lease". Section 2A-103. 16

"Lease agreement". Section 2A-103. 17

"Lease contract". Section 2A-103. 18

"Leasehold interest". Section 2A-103. 19

"Lessee". Section 2A-103. 20

"Lessee in ordinary course of business". Section 2A-103. 21

"Lessor". Section 2A-103. 22

120

"Lessor's residual interest". Section 2A-103. 1

"Letter of credit". Section 5-102. 2

"Merchant". Section 2-104. 3

"Negotiable instrument". Section 3-104. 4

"Nominated person". Section 5-102. 5

"Note". Section 3-104. 6

"Proceeds of a letter of credit". Section 5-114. 7

"Prove". Section 3-103. 8

"Sale". Section 2-106. 9

"Securities account". Section 8-501. 10

"Securities intermediary". Section 8-102. 11

"Security". Section 8-102. 12

"Security certificate". Section 8-102. 13

"Security entitlement". Section 8-102. 14

"Uncertificated security". Section 8-102. 15

OFFICIAL COMMENT16

* * * *1716. "Doc ument." The de finition of "do cument" is unchanged in substance fro m the corre sponding definitions in18

former Section 9-105. incorpor ates both tan gible and e lectronic do cuments of ti tle. See Section 1-201(15)[16] and19Comment 15 [16].20

21

SECTION 9-203. ATTACHMENT AND ENFORCEABILITY OF SECURITY INTEREST;22

PROCEEDS; SUPPORTING OBLIGATIONS; FORMAL REQUISITES.23

* * * *24

121

(b) [Enforceability.] Except as otherwise provided in subsections (c) through (i), a security1

interest is enforceable against the debtor and third parties with respect to the collateral only if : 2

(1) value has been given; 3

(2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a4

secured party; and 5

(3) one of the following conditions is met: 6

(A) the debtor has authenticated a security agreement that provides a description of the7

collateral and, if the security interest covers timber to be cut, a description of the land concerned; 8

(B) the collateral is not a certificated security and is in the possession of the secured party9

under Section 9-313 pursuant to the debtor's security agreement; 10

(C) the collateral is a certificated security in registered form and the security certificate11

has been delivered to the secured party under Section 8-301 pursuant to the debtor's security12

agreement; or 13

(D) the collateral is deposit accounts, electronic chattel paper, investment property, or14

letter-of-credit rights, or electronic documents, and the secured party has control under Section 9-15

104, 9-105, 9-106, or 9-107, or 7-106 pursuant to the debtor's security agreement.16

* * * *17

OFFICIAL COMMENT18

* * * *194. Possession, Delivery, or Control Pursua nt to Security Agreement. The other alternatives in subsection (b)(3)20

dispense w ith the requirement of an authenticated security agreement and provide alternative evidentiary tests. Under21paragraph (3)(B), the secured party's possession substitutes for the debtor's authentication under paragraph (3)(A) if the22secured party's possessio n is "pursua nt to the deb tor's security agree ment." That phr ase refers to the debtor's agreement23to the secured party's possession for the purpose of creating a security interest. The phrase sho uld not be c onfused with24the phrase "debtor has a uthe ntic ated a sec urit y agr eem ent, " us ed in pa rag rap h (3 )(A ), wh ich c ontemp late s the deb tor's25authentication of a record . In the unlikely eve nt that possessio n is obtained without the de btor's agreem ent, possession26would not suffice as a substitute for an authenticated security agreement. However, once the security interest has become27

122

enforceab le and has attac hed, it is not impaired by the fact that the secured party's possession is maintained without the1agreement of a subsequent debtor (e.g., a transferee). Possession as contemplated by Section 9-313 is possession for2purposes of subsection (b)(3)(B), even though it may not constitute possession "pursuant to the debtor's agreement" and3consequ ently might not serve as a substitute for an authenticated security agreement under subsection (b)(3)(A).4Subsection (b)(3)(C ) provide s that delivery of a certificated sec urity to the secure d party under Section 8-301 pursuant5to the debtor's security agreement is sufficient as a substitute for an authenticated security agreement. Similarly, under6subsection (b)(3)(D), control of investment property, a deposit account, electronic chattel paper, or a letter-of-credit right,7or electron ic docum ents satisfies the eviden tiary test if control is pu rsuant to the d ebtor's security ag reement.8

* * * *9

SECTION 9-207. RIGHTS AND DUTIES OF SECURED PARTY HAVING POSSESSION10

OR CONTROL OF COLLATERAL.11

* * * * 12

(c) [Duties and rights when secured party in possession or control.] Except as otherwise13

provided in subsection (d), a secured party having possession of collateral or control of collateral14

under Section 9-104, 9-105, 9-106, or 9- 107, or 7-106: 15

(1) may hold as additional security any proceeds, except money or funds, received from the16

collateral; 17

(2) shall apply money or funds received from the collateral to reduce the secured obligation,18

unless remitted to the debtor; and 19

(3) may create a security interest in the collateral.20

* * * *21

SECTION 9-208. ADDITIONAL DUTIES OF SECURED PARTY HAVING CONTROL OF22

COLLATERAL.23

(a) [Applicability of section.] This section applies to cases in which there is no outstanding24

secured obligation and the secured party is not committed to make advances, incur obligations, or25

otherwise give value.26

(b) [Duties of secured party after receiving demand from debtor.] Within 10 days after27

123

receiving an authenticated demand by the debtor: 1

(1) a secured party having control of a deposit account under Section 9- 104(a)(2) shall send2

to the bank with which the deposit account is maintained an authenticated statement that releases the3

bank from any further obligation to comply with instructions originated by the secured party; 4

(2) a secured party having control of a deposit account under Section 9- 104(a)(3) shall: 5

(A) pay the debtor the balance on deposit in the deposit account; or 6

(B) transfer the balance on deposit into a deposit account in the debtor's name; 7

(3) a secured party, other than a buyer, having control of electronic chattel paper under8

Section 9-105 shall: 9

(A) communicate the authoritative copy of the electronic chattel paper to the debtor or10

its designated custodian; 11

(B) if the debtor designates a custodian that is the designated custodian with which the12

authoritative copy of the electronic chattel paper is maintained for the secured party, communicate13

to the custodian an authenticated record releasing the designated custodian from any further14

obligation to comply with instructions originated by the secured party and instructing the custodian15

to comply with instructions originated by the debtor; and 16

(C) take appropriate action to enable the debtor or its designated custodian to make copies17

of or revisions to the authoritative copy which add or change an identified assignee of the18

authoritative copy without the consent of the secured party; 19

(4) a secured party having control of investment property under Section 8- 106(d)(2) or 9-20

106(b) shall send to the securities intermediary or commodity intermediary with which the security21

entitlement or commodity contract is maintained an authenticated record that releases the securities22

124

intermediary or commodity intermediary from any further obligation to comply with entitlement1

orders or directions originated by the secured party; and 2

(5) a secured party having control of a letter-of-credit right under Section 9-107 shall send3

to each person having an unfulfilled obligation to pay or deliver proceeds of the letter of credit to the4

secured party an authenticated release from any further obligation to pay or deliver proceeds of the5

letter of credit to the secured party; and6

(6) a secured party having control of an electronic document shall:7

(A) give control of the electronic document to the debtor or its designated custodian; 8

(B) if the debtor designates a custodian that is the designated custodian with which the9

authoritative copy of the electronic document is maintained for the secured party, communicate to10

the custodian an authenticated record releasing the designated custodian from any further obligation11

to comply with instructions originated by the secured party and instructing the custodian to comply12

with instructions originated by the debtor; and 13

(C) take appropriate action to enable the debtor or its designated custodian to make copies14

of or revisions to the authoritative copy which add or change an identified assignee of the15

authoritative copy without the consent of the secured party.16

OFFICIAL COMMENT17

* * * *182. Scope and Purpose. This section imposes d uties on a secure d party who has contro l of a depo sit account,19

electronic chattel pape r, investment p roperty, or a letter-of-credit righ t, or electron ic docum ents of title. The duty to20terminate the secured party's control is an alogous to the duty to file a term ination stateme nt, imposed by Section 9- 513.21Under subsection (a), it applies only when there is no outstanding secured obligation and the secured party is not22committed to give value. The requirements of this section can be varied by agreement under Section 1-102(3). For23example, a debtor could by contract agree that the secured party may comply with subsection (b) by releasing control24more than 10 days after demand. Also, duties under this section should not be read to conflict with the terms of the25collateral itself. For example, if the collateral is a time deposit account, subsection (b)(2) should not require a secured26party with control to make an early withdrawal of the funds (assuming that were possible) in order to pay them over to27the debto r or put them in an accou nt in the debto r's name. 28

* * * *29

125

SECTION 9-301. LAW GOVERNING PERFECTION AND PRIORITY OF SECURITY1

INTERESTS.2

Except as otherwise provided in Sections 9-303 through 9-306, the following rules determine the3

law governing perfection, the effect of perfection or nonperfection, and the priority of a security4

interest in collateral:5

(1) Except as otherwise provided in this section, while a debtor is located in a jurisdiction, the6

local law of that jurisdiction governs perfection, the effect of perfection or nonperfection, and the7

priority of a security interest in collateral.8

(2) While collateral is located in a jurisdiction, the local law of that jurisdiction governs9

perfection, the effect of perfection or nonperfection, and the priority of a possessory security interest10

in that collateral.11

(3) Except as otherwise provided in paragraph (4), while tangible negotiable documents, goods,12

instruments, money, or tangible chattel paper is located in a jurisdiction, the local law of that13

jurisdiction governs: 14

(A) perfection of a security interest in the goods by filing a fixture filing; 15

(B) perfection of a security interest in timber to be cut; and 16

(C) the effect of perfection or nonperfection and the priority of a nonpossessory security17

interest in the collateral.18

(4) The local law of the jurisdiction in which the wellhead or minehead is located governs19

perfection, the effect of perfection or nonperfection, and the priority of a security interest in as-20

extracted collateral.21

OFFICIAL COMMENT22

126

* * * *15. Law G overning P erfection: Exce ptions. The gen eral rule is subje ct to several ex ceptions. It d oes not ap ply to2

goods covered by a certificate of title (see Section 9-303), deposit accounts (see Section 9-304), investment property (see3Section 9-305), o r letter-of-credit righ ts (see Section 9-306). N or does it ap ply to posse ssory security intere sts, i.e.,4security interests that the sec ured party has perfected by taking possession of the collateral (see paragraph (2)), security5interests perfected by filing a fixture filing (see subparagraph (3)(A)), security interests in timber to be cut (subparagraph6(3)(B)), or security interests in as-extracted collateral (see paragraph (4)).7

a. Possessory Security Interests. Paragraph (2) applies to possessory security interests and provides that perfection8is governed by the local law of the jurisdiction in which the collateral is located. This is the rule of former Section 9-9103(1)(b), except paragraph (2) eliminates the troublesome "last event" test of former law.10

The distinction between nonpo ssessory and poss essory security interests creates the potential for the same11jurisdiction to apply two different choice- of-law rules to determine perfection in the same collate ral. For example, were12a secured party in possession of an instrument or a tangible docume nt to relinquish possession in reliance on temporary13perfection, the applicable law immediately would change from that of the location of the collateral to that of the location14of the debto r. The applicability of two different choice-of-law rules for perfection is unlikely to lead to any material15practical problems. The perfection rules of one Article 9 jurisdiction are likely to be identical to those of another.16Moreover, under pa ragraph (3 ), the relative prio rity of compe ting security interests in tangible collateral is resolved by17reference to the law of the jurisdiction in which the collateral is located, regardless of how the security interests are18perfected.19

* * * *207. Law Governing Effect of Perfection and Priority: Go ods, Do cument s, Instrume nts, M oney, N egotiab le21

Docume nts, and Ta ngible Chattel Paper. Under fo rmer Sec tion 9-103 , the law of a single jurisdictio n governe d both22questions of perfection and those of priority. This Article generally adopts that approach. See paragraph (1). But the23approach may create problems if the debtor and collateral are located in different jurisdictions. For example, assume a24security interest in equip ment locate d in Pennsylvan ia is perfected by filing in Illinois, where the debtor is located. If the25law of the jurisdictio n in which the d ebtor is loca ted were to g overn prio rity, then the priority o f an execution lien on26goods located in Pennsylvania would be governed by rules enacted by the Illinois legislature.27

To address this problem, paragraph (3)(C) divorces questions of perfection from questions of "the effect of28perfection or nonpe rfection and the priority of a security interest." Under paragraph (3)(C), the rights of competing29claimants to tangible collateral are resolved by reference to the law of the jurisdiction in which the collateral is located.30A similar bifurcation applied to security interests in investment property under former Section 9-103(6). See Section 9-31305.32

Paragraph (3)(C) applies the law of the situs to determine priority only with respect to goods (including fixtures),33instruments, money, tangible negotiable docume nts, and tangib le chattel paper. Compare former Section 9-103(1), which34applied the law of the location of the collateral to documents, instruments, and "ordinary" (as opposed to "mobile")35goods. This Article does not distinguish among types of goods. The o rdinary/mobile good s distinction appears to add ress36concerns about where to file and search, rather than concerns about priority. There is no reason to p reserve this37distinction under the bifurcated approach.38

Particularly serious confusion may arise when the choice-of-law rules of a given jurisdiction result in each of two39competing security interests in the same collateral being governed by a different priority rule. The potential for this40confusion existed under former Section 9-103(4) with respect to chattel paper: Perfection by possession was governed41by the law of the location of the paper, whereas perfection by filing was governed by the law of the location of the debtor.42Consider the mess that would have been created if the language or interpretation of former Section 9-308 were to differ43in the two relevant States, or if one of the relevant jurisdictions (e.g., a foreign country) had not adopted Article 9. The44potential for confusion could hav e been exa cerbated when a secu red party p erfected both by taking possession in the45State where the collateral is located (State A) and by filing in the State where the debtor is located (State B)--a common46practice for some chattel paper financers. B y providing that the law of the ju risdiction in which the collateral is located47governs priority, paragraph (3) substantially diminishes this problem.48

* * * *49

SECTION 9-308. WHEN SECURITY INTEREST OR AGRICULTURAL LIEN IS50

127

PERFECTED; CONTINUITY OF PERFECTION.1

OFFICIAL COMMENT2

* * * *34. Continuous Perfection. The follow ing examp le illustrates the op eration of sub section (c): 4Examp le 1: Debtor, an importer, creates a security interest in goods that it imports and the documents of title that5

cover the goods. The secured party, Bank, takes possession of a tangible negotiable b ill of lading cov ering certain6imported goods and thereby perfects its security interest in the bill of lading and the goods. See Sections 9-313(a), 9-7312(c)(1). Bank rele ases the bill of la ding to the debtor for the purpose of procuring the goods from the carrier and8selling them. Under Section 9-312(f), Bank continues to have a perfected security interest in the document and goods9for 20 days . Bank files a fina ncing stateme nt covering th e collateral b efore the exp iration of the 20 -day period . Its10security interest now continues perfected for as long as the filing is good.11

If the successive stages of Bank's security interest succeed each other without an intervening gap, the security interest12is "perfe cted continu ously," and the date of p erfection is whe n the security intere st first became p erfected (i. e., when13Bank received possession of the tangible bill of lading). If, however, there is a gap between stages--for example, if Bank14does not file until after the expiration of the 20-day period specified in Section 9-312(f) and leaves the collateral in the15deb tor's possession--then, the chain being broken, the perfection is no longer continuo us. The da te of perfectio n would16now be the date of filing (after expiration of the 20-day p eriod). Bank's security interest would be vulnerable to any17interests arising d uring the gap period wh ich under S ection 9-31 7 take prio rity over an unp erfected sec urity interest.18

* * * *19

SECTION 9-310. WHEN FILING REQUIRED TO PERFECT SECURITY INTEREST OR20

AGRICULTURAL LIEN; SECURITY INTERESTS AND AGRICULTURAL LIENS TO21

WHICH FILING PROVISIONS DO NOT APPLY.22

* * * *23

(b) [Exceptions: filing not necessary.] The filing of a financing statement is not necessary to24

perfect a security interest: 25

(1) that is perfected under Section 9-308(d), (e), (f), or (g); 26

(2) that is perfected under Section 9-309 when it attaches; 27

(3) in property subject to a statute, regulation, or treaty described in Section 9-311(a); 28

(4) in goods in possession of a bailee which is perfected under Section 9- 312(d)(1) or (2);29

(5) in certificated securities, documents, goods, or instruments which is perfected without30

filing, control, or possession under Section 9-312(e), (f), or (g); 31

128

(6) in collateral in the secured party's possession under Section 9-313; 1

(7) in a certificated security which is perfected by delivery of the security certificate to the2

secured party under Section 9-313; 3

(8) in deposit accounts, electronic chattel paper, electronic documents, investment property,4

or letter-of-credit rights which is perfected by control under Section 9-314; 5

(9) in proceeds which is perfected under Section 9-315; or 6

(10) that is perfected under Section 9-316.7

* * * *8

SECTION 9-312. PERFECTION OF SECURITY INTERESTS IN CHATTEL PAPER,9

DEPOSIT ACCOUNTS, DOCUMENTS, GOODS COVERED BY DOCUMENTS,10

INSTRUMENTS, INVESTMENT PROPERTY, LETTER-OF-CREDIT RIGHTS, AND11

MONEY; PERFECTION BY PERMISSIVE FILING; TEMPORARY PERFECTION12

WITHOUT FILING OR TRANSFER OF POSSESSION.13

* * * *14

(e) [Temporary perfection: new value.] A security interest in certificated securities, negotiable15

documents, or instruments is perfected without filing or the taking of possession or control for a16

period of 20 days from the time it attaches to the extent that it arises for new value given under an17

authenticated security agreement.18

* * * *19

OFFICIAL COMMENTS20

* * * *213. Chattel Pa per; Nego tiable Docum ents. Subsectio n (a) further pr ovides that filing is available as a method of22

perfection for security interests in chattel paper and negotiable docum ents. Tangible chattel paper is sometimes delivered23to the assignee, and so metimes left in the h ands of the a ssignor for co llection. Subs ection (a) allo ws the assignee to24perfect its security interest by filing in the latter case. Alternatively, the assignee may perfect by taking possession. See25

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Section 9-313(a). An assignee of electronic chattel paper may perfect by taking control. See Sections 9-314(a), 9-105.1The security interest of an assignee who takes possession or control may qualify for priority over a competin g security2interest perfected by filing. See Section 9-330.3

Negotiab le docume nts may be, an d usually are, d elivered to the secured p arty. See Article 1, Section 1-2014(definition of “delivery”). The secu red party's taking possession of a tangible d ocumen t or control o f an electronic5document will suffice as a perfection step. See Sections 9-313(a), 9-314 and 7-106.. However, as is the case with chattel6paper, a security interest in a negotiable document may be perfected by filing.7

* * * *87. Goods Covered by Document of Title. Subsection (c) applies to goods in the possession of a bailee who has9

issued a negotiab le document covering the goods. Subsection (d) applies to goods in the possession of a bailee who has10issued a nonnegotiable document of title, including a document of title that is "nonnegotiable" under Section 7-104.11Section 9-313 go verns perfec tion of a secur ity interest in goods in the possession of a bailee who has not issued a12document of title.13

Subsection (c) clarifies the perfection and priority rules in former Section 9-304(2). Consistently with the provisions14of Article 7, subsection (c) takes the position that, as long as a negotiable document covering goods is o utstanding, title15to the good s is, so to say, locke d up in the d ocumen t. Accord ingly, a security interest in goods covered by a negotiab le16document may be perfected by perfecting a security interest in the document. The security interest also may be perfected17by another me thod, e.g., by filing. T he priority rule in subsection ( c) governs only priority between (i) a security interest18in goods which is perfected by perfecting in the document and (ii) a security interest in the goods which becomes19perfected by another m ethod while the good s are cover ed by the do cument. 20

Examp le 1: While wheat is in a grain elevator and covered by a negotiable warehouse receipt, Debtor creates a21security interest in the wheat in favor of SP-1 and SP-2. SP-1 perfects by filing a financing statem ent covering "wheat."22Thereafter, SP-2 perfects by filing a financing statement describing the warehouse receipt. Subsection (c)(1) provides23that SP-2's secu rity interest is perfecte d. Subsec tion (c)(2) p rovides that S P-2's security intere st is senior to SP -1's. 24

Examp le 2: The facts are as in Example 1, but SP-1's security interest attached and was perfected before the goods25were delivered to the grain elevator. Subsection (c)(2) does not apply, because SP-1's security interest did not become26perfected during the time that the wheat was in the possession of a bailee. Rather, the first-to-file-o r-perfect prio rity rule27applies. See Sections 9-322 and 7-503.28

A secured party may become "a holder to whom a negotiable document of title has been duly negotiated" under29Section 7-501. If so, the secured party acquires the rights specified by Article 7. Article 9 does not limit those rights,30which may include the right to priority over an earlier-perfected security interest. See Section 9-331(a).31

Subsection (d) takes a differen t approac h to the proble m of good s covered by a nonne gotiable do cument. H ere, title32to the good s is not looked on as being locked up in the docum ent, and the se cured pa rty may perfect its security interest33directly in the goods by filing as to them. The subsection provides two other methods of perfection: issuance of the34document in the secured party's name (as consignee of a straight bill of lading or the person to whom delivery would be35made under a non-nego tiable warehouse receipt) and receipt of notification of the secured party's interest by the bailee.36Perfection under sub section (d) o ccurs when the bailee rec eives notification of the secured party's interest in the goods,37regardless of who sends the notification. Receipt of notification is effec tive to perfect, regardless of whether the bailee38responds. Unlike former Se ction 9-30 4(3), from which it derives, subsection (d) does not apply to goods in the possession39of a bailee who has not issued a document of title. Section 9-313(c) covers that case and provides that perfection by40possession as to good s not cover ed by a do cument req uires the bailee 's acknowled gment.41

8. Temporary Perfection Without Having First Otherwise Perfected. Subsection (e) follows former Section429-304(4) in giving perfec ted status to sec urity interests in certificated sec urities, instruments, a nd negotia ble docu ments43for a short period (reduced from 21 to 20 days, wh ich is the time pe riod gener ally applicab le in this Article), although44there has been no filing and the co llateral is in the debtor's possession or control. The 20-day temporary perfection runs45from the date of attachment. There is no limitation on the purpose for which the debtor is in possession, but the secured46party must hav e given "ne w value" (d efined in Sec tion 9-102 ) under an a uthenticated security agreem ent.47

9. Maintaining Perfection After Surrendering Possession. There are a variety of legitimate reasons--many of48them are described in subsections (f) and (g)--why certain types of collateral must be released temporarily to a debtor.49No useful purpo se would be served by cluttering the files with records of such exceedingly short term transa ctions.50

Subsection (f) affords the possibility of 20-day perfection in negotiable documents and goods in the possession of51a bailee but no t covered by a negotiab le docum ent. Subsection (g) provides for 20-day perfection in certificated securities52

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and instruments. These subsections derive from former Section 9-305(5). However, the period of temporary perfection1has been reduced from 21 to 20 days, which is the time period generally app licable in this Artic le, and "en forcemen t"2has been added in subsection (g) as one of the special and limited purposes for which a secured party can release an3instrument or certificated security to the de btor and still remain perfected. The period of temporary perfection runs from4the date a secured party who already has a perfected secu rity interest turns over the c ollateral to the debtor. There is no5new value requirement, but the turnover must be for one or more of the purposes stated in subsection (f) or (g). The 20-6day period may be extended by perfecting as to the collateral by another method before the period expires. However,7if the security interest is not perfected by another method until after the 20-day period expires, there will be a gap during8which the security interest is unperfected.9

Temporary perfection extends only to the negotiable document or goods under subsection (f) and only to the10certificated security or instrument under subsection (g). It does not extend to proceeds. If the collateral is sold, the11security interest will continue in the proceeds for the period specified in Section 9-315.12

Subsections (f) and (g) deal only with perfection. O ther sections o f this Article gove rn the priority o f a security13interest in goods after surrender of possession or contro l of the document covering them. In the case of a purchase-money14security interest in invento ry, priority may b e conditioned upon giving notification to a prior inventory financer. See15Section 9-324.16

17

SECTION 9-313. WHEN POSSESSION BY OR DELIVERY TO SECURED PARTY18

PERFECTS SECURITY INTEREST WITHOUT FILING.19

(a) [Perfection by possession or delivery.] Except as otherwise provided in subsection (b), a20

secured party may perfect a security interest in tangible negotiable documents, goods, instruments,21

money, or tangible chattel paper by taking possession of the collateral. A secured party may perfect22

a security interest in certificated securities by taking delivery of the certificated securities under23

Section 8-301.24

* * * * 25

OFFICIAL COMMENT26

* * * *272. Perfection by Possession. As under the common law of pledge, no filing is required by this Article to perfect a28

security interest if the secured party takes possession of the collateral. See Section 9-310(b)(6).29This section permits a security interest to be perfected by the taking of possession only when the collateral is goods,30

instruments, tangible negotiable d ocumen ts, money, or tangible chattel paper. Accoun ts, commer cial tort claims, d eposit31accounts, investment property, letter-of-credit rights, letters of credit, and oil, gas, or other minerals before extraction32are excluded. (But see Comment 6, below, regarding certificated securities.) A security interest in accounts and payment33intangibles--pro perty not ordinarily represented by any writing whose delivery operates to transfer the right to paymen t--34may under this Ar ticle be perfected only by filing. This rule would not be affected by the fact that a security agreement35or other reco rd describ ed the assignm ent of such co llateral as a "p ledge." Section 9-309(2 ) exempts fro m filing certain36assignments of accoun ts or payme nt intangibles wh ich are out o f the ordinary c ourse of financing. These exempted37assignments are perfected when they attach. Similarly, under Section 9-309(3), sales of payment intangibles are38

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automatically perfected.1

2

SECTION 9-314. PERFECTION BY CONTROL.3

(a) [Perfection by control.] A security interest in investment property, deposit accounts, letter-4

of-credit rights, or electronic chattel paper, or electronic documents may be perfected by control of5

the collateral under Section 9-104, 9-105, 9-106, or 9- 107, or 7-106.6

(b) [Specified collateral: time of perfection by control; continuation of perfection.] A7

security interest in deposit accounts, electronic chattel paper, or letter-of-credit rights, or electronic8

documents is perfected by control under Section 9-104, 9-105, or 9-107, or 7-106 when the secured9

party obtains control and remains perfected by control only while the secured party retains control.10

(c) [Investment property: time of perfection by control; continuation of perfection.] A11

security interest in investment property is perfected by control under Section 9-106 from the time12

the secured party obtains control and remains perfected by control until: 13

(1) the secured party does not have control; and 14

(2) one of the following occurs: 15

(A) if the collateral is a certificated security, the debtor has or acquires possession of the16

security certificate; 17

(B) if the collateral is an uncertificated security, the issuer has registered or registers the18

debtor as the registered owner; or 19

(C) if the collateral is a security entitlement, the debtor is or becomes the entitlement20

holder.21

OFFICIAL COMMENT22

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* * * *12. Contr ol. This section provides for perfection by control with respect to investment property, deposit acco unts,2

letter-of-credit rights, and electronic chattel paper, and electro nic docume nts. For expla nations of ho w a secured party3takes control of these types of collateral, see Sections 9-104 through 9-107 and Section 7-106. Subsection (b) explains4when a security interest is perfected by control and how long a security interest remains perfected by control. Like5Section 9-313(d) and for the same reasons, subsection (b) makes no reference to the doctrine of "relation back." See6Section 9-313, C ommen t 5. As to an electronic document that is reissued in a tangible medium, Section 7-105, a secured7party that is perfected by control in the electronic document should file as to the document before relinquishing control8in order to maintain continuous perfection in the document. See Section 9-308.9

10

SECTION 9-317. INTERESTS THAT TAKE PRIORITY OVER OR TAKE FREE OF11

SECURITY INTEREST OR AGRICULTURAL LIEN.12

* * * *13

(b) [Buyers that receive delivery.] Except as otherwise provided in subsection (e), a buyer,14

other than a secured party, of tangible chattel paper, tangible documents, goods, instruments, or a15

security certificate takes free of a security interest or agricultural lien if the buyer gives value and16

receives delivery of the collateral without knowledge of the security interest or agricultural lien and17

before it is perfected.18

(c) [Lessees that receive delivery.] Except as otherwise provided in subsection (e), a lessee of19

goods takes free of a security interest or agricultural lien if the lessee gives value and receives20

delivery of the collateral without knowledge of the security interest or agricultural lien and before21

it is perfected.22

(d) [Licensees and buyers of certain collateral.] A licensee of a general intangible or a buyer,23

other than a secured party, of accounts, electronic chattel paper, electronic documents, general24

intangibles, or investment property other than a certificated security takes free of a security interest25

if the licensee or buyer gives value without knowledge of the security interest and before it is26

perfected.27

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* * * *1

OFFICIAL COMMENT2

* * * *36. Purchaser s Other Th an Secured Parties. Subsections (b), (c), and (d) afford priority over an unperfected4

security interest to certain purchasers (other than secured parties) of collateral. They derive from former Sections 9-5301(1)(c), 2A-307(2), and 9-30 1(d). Fo rmer Sec tion 9-301 (1)(c) and (1)(d) pro vided that un perfected security interests6are "subordinate" to the rights of certain purchasers. But, a s former Comment 9 suggested, the practical effect of7subordination in this context is that the purchaser takes free of the se curity interest. To avoid any p ossible8misinterpreta tion, subsectio ns (b) and ( d) of this section use the phra se "takes free ."9

Subsection (b) governs goods, as well as intangibles of the type whose transfer is effected by physical delivery of10the representative piece of pa per (tangib le chattel pap er, tangible documents, instruments, and security certificates). To11obtain priority, a buyer must both give value and receive delivery of the collateral without knowledge of the existing12security interest and before perfection. Even if the buyer gave value without knowledge and before perfection, the buyer13would take subject to the security interest if perfection occurred before physical delivery of the collateral to the buyer.14Subsection (c) contains a similar rule with resp ect to lessees of goods. No te that a lessee of goods in ordinary co urse of15business takes free of all security interests created by the lessor, even if perfected. See Section 9-321.16

Norma lly, there will be no question wh en a buyer o f tangible chattel pap er, tangible documents, instruments, or17security certificates "receives delivery" of the property. See Section 1-201 (defining "delivery"). However, sometimes18a buyer or le ssee of goo ds, such as co mplex ma chinery, takes delivery of the goods in stages and complete s assembly19at its own location. Under those circumstances, the buyer or lessee "receives delivery" within the meaning of subsections20(b) and (c) when, after an inspection of the portion of the goods remaining with the seller or lessor, it would be apparent21to a potential lender to the seller or lessor that anothe r person might have an interest in the goo ds.22

The rule of subsection (b) obviously is not appropriate where the collateral consists of intangibles and there is no23representative piece of paper whose physical delivery is the only or the customa ry method o f transfer. The refore, with24respect to such intangibles (accounts, electronic ch attel paper, electronic docume nts, general intangibles, and investment25property other than certificated securities), subsection (d) gives priority to any buyer who gives value without knowledge,26and before perfection, of the security interest. A licensee of a general intangible takes free o f an unperfec ted security27interest in the general inta ngible unde r the same circ umstances. N ote that a licensee of a general intangible in ordinary28course of business takes rights under a nonexclusive license free of security inter ests created b y the licensor, ev en if29perfected. See Section 9-321.30

Unless Section 9-109 excludes the transaction from this Article, a buyer of accounts, chattel paper, payment31intangibles, or prom issory notes is a "secured party" (defined in Section 9-102), and subsections (b) and (d) do not32determine priority of the security interest created by the sale. Rather, the priority rules generally applicable to competing33security interests apply. See Section 9-322.34

* * * *35

SECTION 9-322. PRIORITIES AMONG CONFLICTING SECURITY INTERESTS IN AND36

AGRICULTURAL LIENS ON SAME COLLATERAL.37

OFFICIAL COMMENT38

* * * *39Examp le 3: On October 1, A acquires a temporarily perfected (20-day) security interest, unfiled, in a tangible40

negotiable document in the debtor's possession under Section 9-312(e ). On Octobe r 5, B files and thereby perfects a41security interest that previously had attached to the same document. On October 10, A files. A has priority, even after42the 20-day period expires, regardless of whether A knows of B 's security interest when A files. A was the first to perfect43and maintained continuous perfection o r filing since the start of the 20-day pe riod. Ho wever, the p erfection of A 's44security interest extends only "to the extent it arises for new value given." To the extent A's security interest secures45

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advances made by A beyond the 20-day period, its security interest would be su bordinate to B's, inasmuch as B was the1first to file.2

* * * *38. Proceeds of Non-Filing Collateral: Non-Temporal Priority. Subsectio n (c)(2) pro vides a bas eline priority rule4

for proceeds of non-filing collateral which applies if the secured party has taken the steps required for non- temporal5priority over a conflicting security interest in non-filing collate ral (e.g., contro l, in the case of de posit acco unts, letter-of-6credit rights, and investment pr operty, and in some cases, electronic negotiable documents, section 9-331). This rule7determines priority in proceeds of non-filing collateral whether or not there exists an actual conflicting security interest8in the original non-filing c ollateral. Un der subsec tion (c)(2), the priority in the orig inal collateral co ntinues in proceeds9if the security interest in proceeds is perfected and the proceeds are cash proceeds or non-filing proceeds "of the same10type" as the original collateral. As used in subsection (c)(2), "type" means a type of collateral defined in the Uniform11Commercial Code and should be read broadly. For example, a security is "of the same type" as a security entitlement12(i.e., investment p roperty), and a promisso ry note is "of the same type" as a draft (i.e., an instru ment). 13

* * * *14

SECTION 9-323. FUTURE ADVANCES.15

OFFICIAL COMMENT16

* * * *17Examp le 2: On October 1, A acquires a temporarily perfected (20-day) security interest, unfiled, in a tangible18

negotiable document in the debtor's possession under Section 9-312(e) or (f). The security interest secures an advance19made on that day as well as future advances. On Octobe r 5, B files and thereby per fects a security intere st that previou sly20had attached to the same document. On October 8, A makes an additional advance. On O ctober 10 , A files. Under21Section 9-322(a)(1), because A was the first to perfect and maintained continuous perfection or filing since the start of22the 20-day period, A has priority, even after the 20-day period expires. See Section 9- 322, Comment 4, Example 3.23However, under this section, for purposes of Section 9-322(a)(1), to the extent A's security interest secures the October248 advance, the security interest was perfected on October 8. Inasmuch as B perfected on October 5, B has priority over25the October 8 advance.26

* * * *27

SECTION 9-338. PRIORITY OF SECURITY INTEREST OR AGRICULTURAL LIEN28

PERFECTED BY FILED FINANCING STATEMENT PROVIDING CERTAIN29

INCORRECT INFORMATION.30

If a security interest or agricultural lien is perfected by a filed financing statement providing31

information described in Section 9-516(b)(5) which is incorrect at the time the financing statement32

is filed:33

(1) the security interest or agricultural lien is subordinate to a conflicting perfected security34

interest in the collateral to the extent that the holder of the conflicting security interest gives value35

in reasonable reliance upon the incorrect information; and36

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(2) a purchaser, other than a secured party, of the collateral takes free of the security interest or1

agricultural lien to the extent that, in reasonable reliance upon the incorrect information, the2

purchaser gives value and, in the case of tangible chattel paper, tangible documents, goods,3

instruments, or a security certificate, receives delivery of the collateral.4

5

SECTION 9-601. RIGHTS AFTER DEFAULT; JUDICIAL ENFORCEMENT; CONSIGNOR6

OR BUYER OF ACCOUNTS, CHATTEL PAPER, PAYMENT INTANGIBLES, OR7

PROMISSORY NOTES.8

* * * *9

(b) [Rights and duties of secured party in possession or control.] A secured party in10

possession of collateral or control of collateral under Section 9-104, 9-105, 9-106, or 9-107, or 7-10611

has the rights and duties provided in Section 9-207.12

* * * *13

PROPOSED REVISIONS TO UNIFORM COMMERCIAL CODE, …

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